AIG seeks to rebound from $7.8 billion loss

NEW YORK--Despite American International Group Inc.'s record $7.81 billion first-quarter loss, observers say it will remain a financial powerhouse.

AIG President and Chief Executive Officer Martin J. Sullivan's job is secure for now, but observers add that he is under considerable pressure to turn things around.

AIG last week reported that it lost $7.81 billion in 2008's first quarter compared with profits of $4.13 billion during the year-earlier period. The loss reflects a $9.11 billion pretax charge for a net unrealized market valuation loss related to AIG Financial Products Corp.'s super senior credit default swap portfolio.

AIG said it plans to raise another $12.5 billion in capital to strengthen its balance sheet. It said it plans to raise about $7.5 billion through the sale of common stock and equity units, including forward-purchase contracts and junior subordinated debt securities. It also expects to issue fixed-income securities at a later date.

In its property/ casualty operations, AIG posted $12.08 billion in net premiums written--a 0.2% decline. It reported a 96.9% first-quarter combined ratio vs. 87.5% for the comparable period in 2007.

During an analyst call last week, Mr. Sullivan said the housing market remains weak and credit market disruption persisted in the first quarter, which negatively affected results.

"Excluding these external market issues, the underlying fundamentals" of AIG's business remain strong, Mr. Sullivan said.

AIG is not expected to have difficulty raising the capital and will remain strong, observers say.

"Some other large, financial institutions with losses related to (the) subprime (situation) have successfully raised capital, so it appears that there is a market," said Rodney Clark, managing director at rating agency Standard & Poor's Corp. in New York.

S&P lowered AIG's senior debt rating to AA- from AA, but made no change to its AA+ financial strength ratings, although all ratings remain on credit watch with negative implications.

"I'll expect they'll raise the capital and we'll go from there," said Mark Rouck, a senior director at Fitch Ratings in Chicago, which also downgraded AIG's debt ratings to AA- from AA.

In addition, New York-based Moody's Investors Service has placed some of AIG's ratings on review for possible downgrade, but affirmed the Aa2 financial strength rating for its commercial insurance group subsidiaries.

John L. Ward, CEO of Cincinnati-based Cincinnatus Partners L.L.C., an insurance advisory firm said, "It's important to note that AIG is not raising this capital because they have to. They are raising this capital in order to maintain historical rating agency and regulatory capital ratios" and to restore its ratings. "It's important to distinguish that objective and the capital raising from any other, more serious, need," he said.

During the analyst call, company officials stressed the capital will be used to fortify the insurer's balance sheet. "This was not driven by the rating agencies. We went to the agencies and told them of our plans to raise capital," said AIG Chief Financial Officer Steven J. Bensinger.

The first-quarter loss on top of a fourth-quarter 2007 loss of $5.29 billion is "a sign that they have a lot of work to do," Mr. Ward said. Even so, "they're a large, global, strong franchise with in excess of $100 billion of market capital" and have the ability to absorb the losses announced so far, he said.

"They're still a financial powerhouse, for sure," said Joyce Sharaf, assistant vp and managing senior financial at Oldwick, N.J.-based A.M. Best Co. Inc., which has had AIG's rating under review since February.

Whether this will affect AIG's insurance operations is unclear.

"I don't know that their insurance operations are going to be materially affected by what's going on in terms of their normal operations," she said. Although affected by price and competitive pressures, AIG's commercial operations have "an excellent franchise," she said.

"There is still no other company like this in terms of its size, its reach and its international franchise," said Cliff Gallant, an analyst with Keefe, Bruyette & Woods Inc. in New York.

However, AIG's loss is not in line with its previous results.

"The overall results suddenly at AIG are not the stellar results we always associated with the company and, if anything, they are at risk of slipping into mediocrity, so AIG will be fine. It'll survive. The question is can it regain its cache as being the blue chip leader?" Mr. Gallant said.

Meanwhile, observers say Mr. Sullivan is expected to retain his position, at least for now.

"I think the board has been patient for a good reason," said Mr. Gallant. Many of the issues now confronting the company "are not in businesses that he grew or developed. In fact, he did try to pare back the subprime real estate exposure back in 2005.

"But that said, he seemed to have thought three months ago that the company had excess capital," but now AIG needs to raise additional capital. "I think for now he enjoys the confidence of the board, but at some point you expect that patience will be tried," Mr. Gallant said.

"I think he's under pressure and he needs to perform and expectations are very high and he's going to have to work very hard to turn this around," Mr. Ward said.

Furthermore, observers say that as a large financial institution, AIG's subprime problems are unique and do not reflect comparable problems among other property/casualty insurers.

The unit that has generated the most market-to-market losses, AIG Financial Products, is "really a financial products company," said Fitch's Mr. Rouck. "You don't find a lot of insurance organizations that were participating in that business.

"It's a little bit different than your run-of-the mill commercial property/casualty, life or retirement services-type business," Mr. Rouck said. Losses reported by other P/C insurers in this area have not been as significant. "It's a matter of magnitude."

Separately last week, AIG named Mr. Bensinger vice chairman, financial services, effective immediately. The company said a search is under way for his successor as CFO.