This is a summary of the second quarter fiscal 2008 earnings call conducted by American International Group, Inc. (AIG) on August 7, 2008.
Management:
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VP and Director – IR: Charlene M. Hamrah
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Chairman and CEO: Robert B. Willumstad
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EVP and CFO: Steven J. Bensinger
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VP - Life and Retirement Services: Christopher Swift
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CFO AIG Financial Services: Elias Habayeb
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President and CEO UGC: William V. Nutt, Jr
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VP and Chief Risk Officer: Kevin B. McGinn
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Sr. VP – Investments: Richard W. Scott
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Chief Accounting Officer: David Herzog
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VP and Casualty Actuary: Frank H. Douglas
Key Investor Issues:
- The world''s largest insurer lost $5.36 billion in the quarter, or $2.06 per share vs. profit of $4.28 billion, or $1.64 per share a year ago.
- The company’s general insurance segment reported a 54.3% drop in operating income to $1.39 billion.
- The life insurance and retirement services division posted a 10% decline in operating income to $2.61 billion.
- Premiums, deposits and other revenue were $25.55 billion, up 16.4% from a year ago.
- Consumer finance division posted a $22 million operating loss compared to $58 million in operating income last year.
Second Quarter Highlights:
The second quarter results do not reflect the earnings power of AIG''s businesses. The loss reported for the quarter resulted from some external factors, as well as some company specific operating issues.
The company reported large investment impairment charges and unrealized losses that were primarily driven by severe conditions in the housing and credit markets. AIG had a $3.6 billion after tax unrealized market valuation loss on super senior credit default swap in the capital markets business and a $4.4 billion after tax other than temporary impairment charge relating to the company’s investment portfolio. This loss is smaller than the after tax loss of 5.9 billion recognized in the first quarter.
Regarding the 4.4 billion of after tax impairment charges in the investment portfolio, approximately two-thirds of the severity component of those charges was already reflected as unrealized depreciation in shareholders equity at March 31st.
The company experienced below average investment performance in the quarter.
Net investment income in the second quarter was $6.7 billion, lower than the 7.9 billion, reported last year but above what was reported in the first quarter. Partnership income was the principle driver of the second quarter results and the company’s focus on liquidity also dampened the returns.
AIG reported an operating loss of $518 million pre-tax at United Guaranty from mortgage insurance business, largely reflecting the same housing and mortgage market conditions that drove the unrealized market valuation loss in the CDS portfolio.
The disruption in the U.S housing market continues to dominate the reported results.
AIG reported a net loss for the third consecutive quarter. There was a tempering of some of the marks in the quarter as exemplified by the reduction in size of the AIGFP unrealized market valuation loss in the second quarter compared, to the first, and the reduction and the decline of a cumulated other comprehensive income which reflects the change in the unrealized depreciation of the available for sales securities.
The company’s capital position is stronger today than it was as of the end of the first quarter.
Total equity on hybrid capital increased in the quarter to $96.8 billion as a result of capital raise, that''s less than a 5% decline from the company’s year-end position.
Financial debt to total capital ratio has declined to 13.7% indicating increased financial flexibility.
The company reported a net loss for the quarter, which totaled about $5.4 billion.
Including that total are approximately $4.4 billion of after tax other than temporary impairment charges. They are reflected in the caption titled Realized Capital Losses, but in fact represent almost entirely unrealized market valuation losses. Actual sales activity of securities in the quarter resulted in a pre-tax net gain of about $200 million.
Almost two-thirds of the severity component of the other than temporary impairment charge was already reflected as a reduction in ALCI as of March 31st, this is in stark contrast to what occurred in the first quarter.
Of the $6.8 billion pre-tax other than temporary impairment charge, 4.8 billion relates to severity losses.
