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As AIG Profit Tumbles on Credt Valuations; Chief of Derivatives Unit Resigns(BestWire Services Via Thomson Dialog NewsEdge) Battered by a $5.29 billion fourth-quarter net loss resulting from more than $11 billion in pretax charges involving valuation of a credit default swap portfolio, American International Group Inc. announced the retirement of the chief executive of its derivatives unit. AIG (NYSE: AIG) senior executives conducted a lengthy call with analysts Feb. 29, seeking to assure that the company remains well-capitalized and is acting to address the credit-swap valuation issue. The company?s stock dropped on opening, with shares selling at $47.17 in early trading on Feb. 29, down 6% from the previous close. AIG Chief Executive Officer Martin Sullivan announced the retirement of Joseph J. Cassano, head of AIG Financial Products Corp., effective March 31. He said William N. Dooley, corporate senior vice president of financial services, will lead day-to-day operations of AIGFP in addition to his regular duties while AIG seeks a permanent replacement. Cassano will stay on as a consultant until the end of the year. ?AIG?s results in 2007 were clearly unsatisfactory,? Sullivan said. ?This was a very challenging quarter and year. The rapid deterioration of the U.S. credit and real estate markets significantly affected several of our operations and investments.? Sullivan said the immediate future did not look much brighter. "During 2008, we expect the U.S. housing market to remain weak and credit market uncertainty will likely persist," he said. "Continuing market deterioration would cause AIG to report additional unrealized market valuation losses and impairment charges." However, Sullivan said, AIG remained a strong and viable company. ?We have a strong capital base, and we are not seeking new capital,? he said, adding that while AIG faces challenges it ?can and will manage through.? Sullivan said the unrealized valuation declines in the credit swap portfolio will not translate into significant realized losses over time, and that any credit losses that do occur in the future will not significantly affect AIG's overall financial condition. However, he said, such credit losses could have a material effect on operating results in individual reporting periods. ?AIG expects these losses to reverse over the life of the super senior credit swap portfolio,? he said. The fourth-quarter charges, amounting to $7.23 billion after taxes, cover the super senior credit default swap portfolio. The $5.29 billion loss for the quarter compares with net income of $3.44 billion in the same period a year earlier. For the year, AIG reported net income of $6.2 billion, down 55.9% from net income of $14.05 billion in 2006. Credit default swap charges for the year totaled $7.46 billion after taxes. AIG said its fourth-quarter results also included pretax net realized capital losses of $2.63 billion, mainly from what it described as "other than temporary impairment charges" and an additional $643 million pretax charge related to AIG Financial Products' available-for-sale investment securities. "The 2007 other-than-temporary charges resulted primarily from the significant, rapid declines in market values of certain residential mortgage-backed securities in the fourth quarter for which AIG cannot reasonably determine that the recovery period will be temporary," the group said. AIG's general insurance operations posted a 22.3% drop in fourth-quarter operating income, to $2.015 billion. The segment's combined ratio deteriorated to 96.63, compared with 91.69 a year earlier. The life insurance and retirement services segment saw fourth-quarter operating income fall 51.3% to $1.29 billion. In the financial services segment, the fourth-quarter operating loss was $10.52 billion, compared with a $158 million loss a year earlier. The fourth-quarter operating loss for the asset management operations was $642 million, compared with operating income of $503 million a year earlier. Two weeks ago, A.M. Best Co. placed the financial strength rating of A++ (Superior) and issuer credit ratings of aa+ of the domestic life and retirement services subsidiaries of AIG under review with negative implications (BestWire, Feb. 14, 2008). In addition, A.M. Best placed the financial strength ratings of A+ (Superior) and issuer credit ratings of aa-of most of AIG?s domestic property/casualty subsidiaries and AIG?s 60% majority owned company, Transatlantic Holdings, Inc., under review with negative implications. That action came after AIG announced its auditors reported a "material weakness" in how the group estimates the value of its credit default swap portfolio (BestWire, Feb. 11, 2008). (By Alyn Ackermann, senior associate editor, BestWeek: [email protected]) Copyright ? 2008 A.M. Best Company, Inc. |