AIG Posts Big Loss Due to Mortgage Woes; Insurance Results Decline, Too

May 8, 2008

The world’s biggest insurance company, American International Group Inc. (AIG), posted a big quarterly loss — $7.81 billion — largely due to write-downs related to bad mortgage investments.

AIG blamed much of the loss on the continuation of the weak U.S. housing market, the disruption in the credit markets, as well as equity market volatility.

For the same period in 2007, AIG reported a $4.13 billion profit.

The company stressed that it was satisfied with the performance of its main insurance operations despite a decline in underwriting profit thus far this year.

The insurer reported higher losses in its property (including from the Atlanta tornadoes), personal auto and workers’ compensation lines.

AIG President and Chief Executive Officer Martin J. Sullivan said that despite the difficult environment and its resulting effect on AIG’s overall financial performance for the first quarter, core insurance businesses continue to perform “satisfactorily.”

General Insurance first quarter 2008 operating income declined 45.9 percent to $1.61 billion compared to the first quarter of 2007. These results reflect lower underwriting profit, principally in AIG Commercial Insurance, Mortgage Guaranty and Personal Lines, and lower net investment income.

General Insurance net premiums written were about even with last year’s total for the same period at $12.1 billion.

The General Insurance combined ratio for the quarter was 96.9% (loss ratio of 70.4%) compared to 87.5% (loss ratio 64.1%) for the same three months last year.

At March 31, 2008, General Insurance net loss and loss adjustment reserves totaled $70.51 billion, a $1.22 billion increase from December 31, 2007.

AIG Commercial Insurance (formerly Domestic Brokerage Group) first quarter 2008 operating income was $958 million, a decline of 48.3 percent compared to the first quarter of 2007, due to declines in both underwriting profit and net investment income. AIG said underwriting results declined as the current accident year loss ratios increased as a result of property losses, including the Atlanta tornados, and workers’ compensation. The current accident year loss ratio remained largely unchanged from the prior year for other classes of business.

Additionally, AIG said its Commercial Insurance unit experienced unfavorable prior year loss development, primarily related to excess casualty losses.

Commercial Insurance first quarter 2008 net premiums written declined 14.9 percent to $5.11 billion compared to the first quarter of2007, primarily due to the return of $339 million in premiums related to loss sensitive policies and declines in workers’ compensation premiums due to reductions in statutory rates and increased competition.

Personal Lines first quarter 2008 operating income was $7 million compared to $105 million in the first quarter of 2007. The loss ratio increased 8.53 points compared to the first quarter of 2007 due to an increase in the current accident year loss ratio and unfavorable loss reserve development on prior accident years. Net premiums written increased 4.8 percent on continued growth in the Private Client Group, while direct and agency auto premiums were virtually unchanged.

AIG also announced a plan to raise approximately $12.5 billion in capital to fortify its balance sheet and provide increased financial flexibility. The capital is to be raised through a common stock offering and an equity-linked offering for an aggregate of approximately $7.5 billion.

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