Ailing insurer plans to raise $12.5bn “to fortify its balance sheet”

American International Group has reported that the continuation of the weak US housing market, the disruption in the credit markets, as well as equity market volatility, had a substantial adverse effect on its results for the first quarter ended 31 March 2008.

These factors were primarily responsible for AIG incurring a net loss for the first quarter of 2008 of $7.81bn. For the 2007 first quarter, AIG reported net income of $4.13bn.

The insurer announced a plan to raise approximately $12.5bn 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 $7.5bn. At a later date AIG also expects to issue high equity content fixed income securities.

Included in the first quarter 2008 net loss and adjusted net loss was a pre-tax charge of approximately $9.11bn ($5.92 billion after tax) for a net unrealised market valuation loss related to the AIG Financial Products Corp (AIGFP) super senior credit default swap portfolio.

Commenting on first quarter 2008 results, AIG president and chief executive officer Martin Sullivan said, "AIG's results do not reflect the underlying strengths and potential of AIG; rather they reflect the extremely adverse external conditions affecting the spectrum of companies exposed to the US residential housing, credit and capital markets.

"While we anticipated a difficult trading environment, the severity of the unrealised valuation losses and decline in value of our investments were beyond our expectations. Current market conditions also contributed to a significant decline in partnership income compared to a record level in the first quarter of 2007, as well as to declines in mutual fund income.

However, the underlying fundamentals of our core businesses remain solid, and several performed quite well in the quarter, despite the challenging environment many faced. Top line production was very strong in many of our businesses including Foreign General, Foreign Life and ILFC. Operations facing competitive market challenges, such as Commercial Insurance and Domestic Life Insurance, are maintaining their focus on profitable growth.

"Despite the challenges of today's markets, our talented and dedicated employees remain focused on serving our clients and executing our global growth strategies. We have established, well run businesses in our chosen markets around the globe and are confident we have the right strategies and resources to succeed. With the support of the newly added capital, we have every confidence in our ability to respond to today's market conditions and opportunities that may arise."

First quarter 2008 results included pre-tax net realised capital losses of $6.09bn ($3.96bn after tax) primarily from other-than-temporary impairment charges in AIG's investment portfolio. This compares to pre-tax net realised capital losses of $70m ($56m after tax) in the first quarter of 2007.

General Insurance first quarter 2008 operating income before net realized capital gains (losses) declined 45.9% to $1.61bn 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.

First quarter 2008 General Insurance net investment income declined 22.9% as increased interest and dividend income was more than offset by lower partnership and mutual fund investment income compared to the first quarter of 2007.

Personal Lines first quarter 2008 operating income was $7 million compared to $105 million in the first quarter of 2007.

At March 31, 2008, General Insurance net loss and loss adjustment reserves totaled $70.51bn, a $1.22bn increase from December 31, 2007. First quarter 2008 net loss development from prior accident years, excluding accretion of discount was favourable by approximately $164m, including approximately $339m of favourable development relating to loss sensitive business which was offset by an equal reduction in earned premiums.