AIG Will Raise $12.5 Billion After Quarterly Loss

AIG Will Raise $12.5 Billion After Quarterly Loss

May 8 (Bloomberg) -- American International Group Inc., the world's largest insurer by assets, said it will raise $12.5 billion after posting its second straight quarterly loss, sending the shares down 7 percent.

AIG had a record first-quarter net loss of $7.81 billion, or $3.09 a share, compared with earnings of $4.13 billion, or $1.58, a year earlier, the New York-based company said today in a statement. The insurer wrote down the value of contracts to protect fixed-income investors by $9.11 billion.

Chief Executive Officer Martin Sullivan's job may be on the line unless he stems losses from the subprime mortgage collapse and reverses a 12-month stock decline of 38 percent. Financial products head Joseph Cassano stepped down after AIG reported a then-record $5.29 billion loss in the fourth quarter.

``There aren't a lot of positives to take away from this,'' said David Havens, a credit analyst at UBS AG in Stamford, Connecticut, in a note to investors. ``Management capability issues, which have been smoldering for a while, are likely to flare up. One of AIG's constant weaknesses has been its complexity. It's come back to bite them.''

Excluding capital losses and the change in the value of some derivatives, the first-quarter loss was $1.41 a share, missing the average 34-cent loss estimate of 17 analysts surveyed by Bloomberg.

Stock Decline

The insurer dropped $3.08 to $41.07 at 4:57 p.m. in New York in extended trading.

The company has already started raising capital, offering $7.5 billion in debt and contracts that obligate holders to buy shares. AIG will issue another $5 billion in fixed-income securities later, spokesman Chris Winans said.

The financial products business, co-founded by Cassano in 1987, guaranteed more than $500 billion of assets for fixed- income investors at the end of 2007, including $61.4 billion in securities tied to subprime mortgages.

``The severity of the unrealized valuation losses and decline in value of our investments were beyond our expectations,'' Sullivan said in the statement.

Standard and Poor's lowered AIG's credit rating to AA- from AA, saying the level of the losses exceeds expectations.

``In addition, weaker operating performance in several units and unrealized investment losses somewhat reduce the ability of subsidiaries to provide dividends to AIG,'' the ratings firm said in a statement.

AIG hasn't had two consecutive quarterly losses since its initial public offering in 1969.

Writedowns, Credit Losses

The world's largest financial institutions reported at least $318 billion in asset writedowns and credit losses tied to the worst U.S. housing slump in more than a quarter century.

Sullivan, 53, told shareholders in February that most of the financial products division's unrealized losses will eventually reverse, and realized losses won't hurt the company's overall health.

He's been trying to persuade regulators to relax accounting rules tied to the writedown. So-called mark-to-market rules require companies to estimate a value on holdings that haven't traded, with the change recorded as an unrealized gain or loss even though the asset wasn't sold.

The 24-company KBW Insurance Index has dropped about 9.6 percent this year as most insurers in the group reported first- quarter profit declines or losses. Rates charged by commercial insurers fell 14 percent in the first quarter from a year earlier as insurers competed for revenue, according to a survey by the Council of Insurance Agents & Brokers in Washington.

Mortgage Insurance

AIG's mortgage insurer, United Guaranty Corp., had a $352 million operating loss, compared with profit of $7 million a year earlier. The unit, which reimburses lenders when borrowers don't pay their loans, may post operating losses through this year, Sullivan told analysts in a February conference.

U.S. homeowners with private mortgage insurance defaulted on 37 percent more loans in March than a year earlier, according to the Washington-based Mortgage Insurance Companies of America.

Profit at AIG's U.S. commercial insurance unit fell 48 percent to $958 million on workers' compensation costs and expenses from tornadoes.

U.S. catastrophe losses for insurers more than doubled to $3.35 billion in the three months ended March 31 as storms pushed claims costs to their highest first-quarter levels in 14 years. Tornadoes that struck from Texas to Ohio in February cost insurers $955 million, according to Insurance Services Office Inc., a Jersey City, New Jersey-based firm. Winter storms on the U.S. West Coast caused $745 million in insured property losses.

Hank Greenberg

Sullivan succeeded Maurice ``Hank'' Greenberg as CEO in March 2005. Two months later, then-New York Attorney General Eliot Spitzer sued AIG and Greenberg, accusing him of ordering improper transactions to hide losses and inflate reserves.

Greenberg denies any wrongdoing in the case, which is still pending. Spitzer dropped portions of the lawsuit in 2006 that included four other allegations tied to the investigation.

Sullivan steered the insurer through a $1.64 billion settlement of probes by federal and state regulators, as well as restatements of 2000 to 2005 results that cut profit by $3.4 billion.

AIG, which bought 76.4 million shares in 2007 and 12.2 million more through Feb. 15, said Feb. 28 it plans to halt repurchases after meeting commitments from last year.

Before 2007, AIG last reported a net loss in the fourth quarter of 2002, when it boosted reserves for covering corporate boards and workers' compensation policies. The insurer posted a $103.8 million loss in that quarter and later restated annual earnings without providing an updated quarterly figure.

(To hear AIG's first-quarter conference call tomorrow at 8:30 a.m. New York time, visit LIVE.)

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