AIG Falls After Insurer Posts Third Straight Loss on Writedowns

 By Hugh Son

Aug. 7 (Bloomberg) -- American International Group Inc., the world's biggest insurer, fell 7.9 percent in extended trading yesterday after housing-related writedowns wiped out profit for a third straight quarter. 

The loss of $5.36 billion, or $2.06 a share, in the second quarter was worse than analysts expected and renewed concern that the New York-based company may need more capital. AIG earned $4.28 billion, or $1.64 a share, a year earlier. 

``It was a pretty horrific quarter, just scary,'' said Donn Vickrey, analyst at research firm Gradient Analytics Inc., who has the equivalent of a ``sell'' rating on AIG. ``Operations suffered across the board; I don't think you can rule out another capital raise.'' 

The results intensify pressure on Chief Executive Officer Robert Willumstad to turn around AIG, which declined 50 percent in New York trading this year before today and posted three quarterly losses totaling more than $18 billion. Willumstad, 62, promised to reveal a plan by late September to fix the company after replacing Martin Sullivan on June 15. 

AIG wrote down the value of credit-default swaps by $5.56 billion before taxes in the second quarter. The contracts, which are guarantees AIG sold to protect fixed-income investors, drove the company to record losses in the two previous periods, accounting for about $25 billion in writedowns over nine months. 

Collateral Calls 

AIG has received collateral calls from investors who bought protection offered by the swaps, the insurer said in a regulatory filing. The company posted $16.5 billion of collateral as of July 31 and said it's unable to determine the effect ``that recent transactions involving sales of large portfolios of CDOs will have on collateral posting requirements.'' 

Merrill Lynch & Co., the third-biggest U.S. securities firm, said July 28 it sold $30.6 billion of collateralized debt obligations -- securities packaged from other bonds, many linked to subprime mortgages -- at a fifth of their face value. 

``When counterparties start requiring that you post collateral, the best-case scenario is you don't have use of the cash for quite some time,'' Vickrey said. ``In the worst-case scenario, this is probably a pretty good estimate'' of what the insurer will have to pay on the contracts. 

AIG also marked down investments in the second quarter by $6.08 billion after ``severe, rapid'' drops in the value of securities backed by home loans. 

Profit from private equity and hedge funds plunged 91 percent, and AIG's mortgage insurer posted an underwriting loss of $564 million, a fourfold increase from a year earlier. 

`A Lot of Work' 

``We have a lot of work to do to restore AIG's profitability,'' Willumstad said in a statement. ``Results were adversely affected by the severe conditions in the housing and credit markets and a very difficult investment environment.'' 

The company fell $2.29 to $26.80 at 7:56 p.m. in New York yesterday. Results were announced after the close of regular trading. 

Excluding the declines in the value of some investments, AIG's loss was $1.32 billion, or 51 cents a share, missing by $1.28 the average estimate of 19 analysts surveyed by Bloomberg. 

AIG raised $20.3 billion selling debt and equity in May to protect against further losses. Citigroup Inc. analyst Joshua Shanker said that month the insurer may seek $10 billion more. 

``The biggest fear I have on AIG is that they raise capital'' again, said Matthew Nellans, an analyst at Morningstar Inc. in Chicago. ``I'd love to hear Willumstad say, `We will not dilute investors''' by selling more shares. 

AIG spokesman Nicholas Ashooh declined to comment. 

Mortgage Losses 

AIG's mortgage insurer, which reimburses lenders when borrowers don't pay, may be unprofitable through the middle of next year, the company said. The insurer's American General Finance mortgage lender lost $40 million, compared with profit of $43 million a year earlier. 

Private equity and hedge fund profits fell to $91 million from $992 million. Hedge funds returned $207 million while private equity resulted in a $116 million loss. 

Operating income from the insurer's aircraft leasing unit rose 85 percent to $352 million as the company expanded its fleet and charged more to rent planes. Willumstad decided to hold onto International Lease Finance Corp., ranked No. 1 among aircraft lessors, after reviewing the operation, the company said June 26. 

Willumstad, who is also AIG's chairman, has said he'll meet with the insurer's unit heads, business partners and regulators to get a better feel for the company, which has about $1 trillion of assets, 116,000 employees and operations in more than 100 countries. 

AIG, which gets about a third of its revenue from sales of life insurance and retirement savings products outside the U.S., said profit in that division rose 2.8 percent to $1.68 billion, excluding capital gains and losses. 

The unit that sells coverage for U.S. homeowners and drivers had a $42 million underwriting loss on increased crash costs. The business earned $56 million a year earlier. 

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

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net