AIG: Potential Losses On Multi-Sector CDOs Up To $8.5 Billion
CHICAGO -(Dow Jones)- American International Group Inc. (AIG) has written down the market value of its credit default swap contracts on collateralized debt obligations by $24.8 billion, or to around 69 cents on the dollar for CDOs backed by subprime and Alt-A mortgages, the company’s chief financial officer said Thursday.
Some sectors of its CDOs have been written down even more, to 56 cents on the dollar for so-called mezzanine transactions, which include lower-rated segments of mortgage-backed securities. It has written down subprime-backed CDOs to 66 cents on the dollar for high-grade CDOs.
Those write-downs reflect the declining value of the CDOs, but do not necessarily give a good indication of the actual losses the securities will actually produce, said Steven Bensinger, AIG’s vice chairman of financial services, during AIG’s second-quarter earnings conference call.
In scenarios the company has run to gauge potential actual losses on the portfolio, estimates run from $5 billion to $8.5 billion, compared to the market-value write-downs of $24.8 billion the company has taken over the last three quarters.
The potential ultimate losses will be "substantially less" than the write- downs taken, Bensinger said.
AIG swung to a second-quarter loss on more than $11 billion in investment losses and a write-down related to its credit default swap portfolio. It is the insurance giant’s third consecutive quarterly loss.
The latest quarter included $6.08 billion in pretax net realized capital losses and a $5.56 billion pretax write-down related to its credit default swap portfolio.
During the call, Chief Executive Robert Willumstad said that the company is undertaking a strategic review of all business units, and he repeated earlier comments that one conclusion he has already drawn is that the company’s profitable aircraft leasing business, International Lease Finance Corp., is not on the market.
He had replaced Martin Sullivan, who resigned in June amid pressure from major shareholders to improve the company’s performance.
In the second quarter, AIG reported a net loss of $5.36 billion, or $2.06 a share, compared with net income of $4.28 billion, or $1.64 a share, a year earlier.
The latest results included net realized capital losses of $4.02 billion, primarily from other-than-temporary impairment charges in AIG’s investment portfolio, with an additional $17 million pretax other-than-temporary impairment charge related to available-for-sale investment securities. These charges resulted primarily from rapid declines in market values of residential mortgage- backed securities.
AIG had an operating loss, which excludes investment gains or losses and other items, of 51 cents a share compared with operating earnings of $1.77 a year earlier.
Revenue dropped 36% to $19.9 billion.
Analysts’ mean estimates were for per-share operating earnings of 63 cents on revenue of $31.49 billion, according to a poll by Thomson Reuters.
-By Lavonne Kuykendall, Dow Jones Newswires; 312-750-4141; lavonne.kuykendall@ dowjones.com
(Kathy Shwiff contributed to this report.)
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(END) Dow Jones Newswires 08-07-08 0944ET Copyright (c) 2008 Dow Jones & Company, Inc.
August 7, 2008