Abet Chichi2

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NYT article on AIG losses:

http://www.nytimes.com/2008/05/09/business/09insure.html

Bad Investments and a $7.8 Billion Loss at A.I.G.

By MICHAEL M. GRYNBAUM Published: May 9, 2008

The fortunes of American International Group, one of the world’s biggest insurance companies, rise and fall on precise calculations of risk. Last quarter, those calculations went seriously awry.

In the worst three months of the company’s 89-year history, A.I.G. lost $7.81 billion, primarily from bad investments in complex financial instruments. The loss of $3.09 a share, reported after the market’s close 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 A.I.G. has lost money in two consecutive quarters.

To shore up its finances, the company will seek to raise $12.5 billion by selling new stock and fixed-income securities. Despite the painful quarter, the company plans to raise its dividend by 10 percent — half its usual increase — which will cost an additional $202 million on an annualized basis.

Shares of the company closed at $44.15, down 93 cents, or 2 percent. In after-hours trading, A.I.G. shares fell another 7 percent, and the ratings agencies Standard & Poor’s and Fitch lowered the company’s credit ratings.

The company’s chief executive, Martin J. Sullivan, conceded in a statement that A.I.G. had badly underestimated the extent of the problems in the credit market.

“The severity of the unrealized valuation losses and decline in value of our investments were beyond our expectations,” he 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 A.I.G.” 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, A.I.G. appeared in solid shape. The company reported a profit of $4.13 billion in the first three months of 2007, or $1.58 a share.

But in trying to expand its fortunes, the company had, up until 2006, been involved in 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 subprime mortgages began to collapse and a growing crisis of confidence spread throughout the nation’s financial system, the instruments rapidly lost their value.

The result for A.I.G. was, in the words of one analyst, “gruesome”: its assets lost $9.11 billion in value in the first quarter alone. That hit, coupled with a $6.82 billion loss on investments, decimated the company’s bottom line.

A.I.G., which still holds those battered assets, is hoping that the market for credit default swaps improves in coming months.

The news is likely to raise questions about Mr. Sullivan’s stewardship, but at least one analyst expressed sympathy with his position.

“To be fair to Martin, he walked into this,” said Cliff Gallant, an analyst at Keefe, Bruyette and Woods, an investment bank. “Even if he had foreseen what was going to happen here, I’m not sure he could have done a lot.”

Still, Mr. Gallant, who has a hold recommendation on A.I.G. stock, said the management’s inability to predict the extent of the losses raised questions about its leadership going forward.

“They were very confident” at the beginning of the year, Mr. Gallant said. “They talked about having significant excess capital positions. They didn’t foresee the type of losses they were on the verge of getting.”