AIG Insurance made huge USD 5.3 bilion loss in 2nd quarter - NYT

 

News and Reviews USA : American International Group (AIG), world’s largest Insurance Company is struggling to keep its act togther. It must be bad news for the new CEO and for morale of its staff across the globe. AIG has made 3rd straight loss this quarter, reports New York Times. It should not be a news considering the company made historical loss in Q1 as reported by NYT / NRI’s last quarter note on AIG.

MARY WILLIAMS WALSH in her NYT article says that A.I.G. Posts a Large Loss as Housing Troubles Persist. The big insurer, lost $5.3 billion in the second quarter as housing values slid and disruptions continued in the credit markets.

Securities analysts had been expecting A.I.G. to post a small net gain. Still, its loss was less than the $7.8 billion it lost in the first quarter of this year, which was the worst in A.I.G.’s history.

The continued red ink underscored the way A.I.G. has been battered by the troubles that have been spreading through the financial sector since late last summer. In the second quarter of 2007, before the collapse of mortgage-backed securities began to cause runs on hedge funds and huge losses at banks, A.I.G. earned $4.2 billion.

A.I.G.’s chairman and chief executive, Robert B. Willumstad, cited “a very difficult investment environment,” but said that the company’s current losses did not “reflect the earnings power and potential of A.I.G.’s businesses.”

Mr. Willumstad, who became chief executive in June, said he had begun a comprehensive review of the company’s various businesses in an effort to reduce its risk profile and protect its capital base.

“We are considering all options,” he said, adding that he would make his findings public in September.

A.I.G. issued its second-quarter results after the markets closed Wednesday, along with a statement that summarized the activity of some of its business units. It said it was experiencing a down cycle in its domestic general insurance business, but was getting good results in areas like foreign general insurance and aircraft leasing.

One of A.I.G.’s biggest problems continues to be the credit default swap contracts that its financial products unit sold to investors, allowing buyers to bet on the creditworthiness of mortgage-backed debt obligations.

A.I.G. carries the swaps on its books, and their value rises and falls on the strength of the housing market. That means that as home values continue to fall, A.I.G. has to keep reducing the value of the swaps on its books.

The write-downs cost A.I.G. $5.6 billion before taxes in the second quarter.

A spokesman for A.I.G., Nicholas Ashooh, said that despite the steep decline in the value of the credit default swaps, very few of the mortgage-backed securities underlying them had actually failed, so the losses did not represent cash out the door. But he said the company would have to keep writing the swaps’ value down as long as the housing market slump continued.

Mr. Ashooh said many investors wanted to know how long the write-downs would continue, but A.I.G. was unable to tell them.

A second big problem at A.I.G. in the second quarter involved losses on the company’s overall investment portfolio. Mr. Ashooh said that A.I.G. had not been forced to sell the assets at a loss, but that accounting rules required it to recognize their declining values as a realized capital loss. These losses totaled $6.1 billion before taxes in the second quarter.

A.I.G. also said Wednesday that it had raised $20 billion in new capital in May, to strengthen the company in the wake of previous losses. Still, the company’s shareholders’ equity stood at $78.1 billion at the end of the second quarter, $1.6 billion less than at the end of the first quarter, mainly because of the losses of the second quarter.

Mr. Ashooh said the company still believed it was “adequately capitalized.”