Business Times – 10 May 2008
(NEW YORK) American International Group (AIG) will seek to raise US$12.5 billion to shore up its finances after two straight record losses, adding to speculation that Martin Sullivan may be the next chief executive officer to lose his job amid the global credit crisis.
AIG, the world’s biggest insurer by assets, posted a first-quarter net loss of US$7.81 billion on Thursday compared with earnings of US$4.13 billion a year earlier. AIG disclosed more than US$15 billion in pretax writedowns.
Shareholders are chafing at AIG’s 24 per cent drop this year, which came after Mr Sullivan, 53, reassured them in December that writedowns would be ‘manageable’. The New York-based insurer has since reported more than US$19 billion in losses from contracts sold to protect fixed-income investors and said more are possible, causing analysts to question how much longer Mr Sullivan’s three-year tenure as CEO will last.
‘Management capability issues, which have been smouldering for a while, are likely to flare up,’ David Havens, a credit analyst at UBS in Connecticut, said in a report to investors. ‘One of AIG’s constant weaknesses has been its complexity. It’s come back to bite them.’
AIG wrote down contracts it had sold to protect investors by US$9.11 billion in the first quarter to comply with rules that require the company to estimate their present market value. Mr Sullivan said as recently as March that those losses were temporary, and the actual amount in a worst-case scenario might be US$900 million over a period of years. On Thursday, AIG said the losses might reach US$2.4 billion.
The loss of US$3.09 a share, reported after the market’s close on Thursday, was four times worse than Wall Street analysts had expected.
The venerable insurer now joins the ranks of other industry giants that have suffered huge losses because of the recent tumult in the financial markets. This is the first time AIG has lost money in two consecutive quarters.
Despite the painful quarter, the company plans to raise its dividend by 10 per cent – half its usual increase – which will cost an additional US$202 million on an annualised basis.
The company’s chief executive admitted that AIG badly underestimated the extent of the problems in the credit market.
‘The severity of the unrealised valuation losses and decline in value of our investments were beyond our expectations,’ Mr Martin wrote.
Mr Sullivan, who took over his post in early 2005, wrote that the dismal results ‘do not reflect the underlying strengths and potential of AIG’. He blamed the ‘extremely adverse external conditions’ in the housing and credit markets, but defended the performance of his company’s core insurance business.
A year ago, AIG appeared in solid shape. The company reported a profit of US$4.13 billion in the first three months of 2007, or US$1.58 a share.
But in trying to expand its fortunes, the company placed big bets on an arcane corner of the fixed-income market, where companies traded sophisticated instruments known as credit default swaps.
For awhile, those swaps rewarded investors with enormous returns. But as securities tied to sub-prime mortgages began to collapse and a growing crisis of confidence spread throughout the nation’s financial structure, the instruments rapidly lost their value.
The result for AIG was, in the words of one analyst, ‘gruesome’: its assets lost US$9.11 billion in value in the first quarter alone.
That hit, coupled with a US$6.82 billion loss on investments, decimated the company’s bottom line.
AIG, which still holds those battered assets, is hoping that the market for credit default swaps improves in coming months\. \– Bloomberg, NYT