By MADLEN READ
The Associated Press
Thursday, November 8, 2007; 12:19 AM
NEW YORK -- The world's largest insurer may not have invested as much in mortgage-backed assets as the world's biggest banks, but American International Group Inc.'s exposure to the rocky credit and housing markets was enough to dampen its third-quarter profit.
Losses in AIG's investment portfolio, credit-swap portfolio and mortgage-insurance business added up to about $1.4 billion, and caused net income to fall by 27 percent compared with last year's third quarter.
Back in August, AIG called exposure to subprime debt "minimal." On Wednesday, it maintained that despite some losses due to mortgage-backed bonds, its exposure to the debt remains "high quality," with "substantial protection."
But with asset quality so debatable right now, investors found little solace in the assurance. Also, AIG's life and retirement services segment saw a sizable decline, raising concerns about whether competition might force insurers to lower prices.
Shares fell $1.70, or 2.9 percent, to $56.20 in after-hours trading when the report was released. They had plunged almost 7 percent to close at $57.90 in regular trading Wednesday.
AIG's $872.3 billion-investment portfolio lost $864 million, its credit-swap portfolio lost $352 million, and its mortgage-insurance business lost $215 million.
Those declines caused net income to fall to $3.09 billion, or $1.19 per share, in the July-September period, from $4.22 billion, or $1.61 per share, in the same period last year.
Adjusted to exclude certain items, earnings totaled $3.49 billion, or $1.35 per share, versus $4.02 billion, or $1.53 per share, last year.
Revenue edged up to $29.84 billion from $29.25 billion.
The results fell short of estimates. Analysts surveyed by Thomson Financial projected, on average, profit of $1.62 per share on revenue of $29.91 billion. The estimates usually exclude one-time items.
"While U.S. residential mortgage and credit market conditions adversely affected our results, our active and strong risk management processes helped contain the exposure," said AIG President and Chief Executive Officer Martin J. Sullivan in a statement.
AIG's investment portfolio does include some collateralized debt obligations, instruments that bundle up different types of debt. But the exposure is smaller than that of banks such as Citigroup Inc. and Merrill Lynch & Co., which have written down big losses on their CDO investments. Late Wednesday, Morgan Stanley said it might have to write down $2.5 billion to $6 billion in the fourth quarter because of troubles in the credit market.
Donald Light, senior analyst with financial research and consulting firm Celent, called AIG's report "disappointing, but not disastrous" in a research note.
He said that although AIG saw subprime and credit market-related losses and a 19.1 percent decline in operating income in the life and retirement services unit, there was also solid growth of about 5 percent in the general insurance unit's premiums and only moderate deterioration in underwriting.
In its mortgage insurance unit, AIG paid claims of $445 million, more than quadruple the $91 million it paid in the third quarter of last year. For every dollar collected in mortgage insurance premiums, AIG spent $2.14 administering claims.
AIG's lending business, which saw its delinquency rate rise to 2.22 percent from 1.59 percent a year ago, set aside $214 million to cover unpaid mortgage loans.
And in its credit-swap portfolio, the company foresees a further loss of $550 million through October.
Before releasing its results, AIG was the biggest loser Wednesday among the 30 companies that make up the Dow Jones industrial average, and just last week, it briefly touched a two-year low.
Maurice "Hank" Greenberg, AIG's former chief executive, said in a regulatory filing Friday he is considering "strategic alternatives" to boost the value of his AIG stake. Investors speculated he might want to bid for the company or parts of the company, or force AIG to spin off one of its businesses.
Greenberg was ousted in 2005, when then-New York State Attorney General Eliot Spitzer accused him of fraudulent accounting. The 82-year-old holds a 14 percent stake in AIG through his firm C.V. Starr and said in last week's filing he plans to hold discussions with other major shareholders.
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AP Business Writer Dan Seymour contributed to this report.
