Record losses for AIG

by David Masters

Story link: Record losses for AIG

The world’s largest insurer, AIG, have reported record losses for the fourth quarter of 2007, totalling $5.3 billion.

The loss was incurred as a result of an $11.1 billion write-down of a credit swap portfolio in the company’s financial products unit. This write down was triggered by the sub-prime mortgage crisis. A further loss of $184 million in its personal lines business was reported as a result of the California wild fires.

The company’s combined ratio for the fourth quarter was up to 89.56% compared to 87.74% for the same period the previous year. AIG attribute this increase “primarily to increases in the expense ratio, which included costs for realigning certain entities, principally in the UK.”

Net premiums written for the quarter was up by 5.8% on year. This was driven by growth in primary and excess casualty lines in the corporate sector, and accident and health multiple regions.

However, the insurer’s annual net income saw severe falls of 56% to $6.2 billion.

Martin Sullivan, AIG’s chief executive, said that his company is in “uncharted waters” and that it is taking steps to rectify the valuation of its derivative portfolio. The company was warned last month by auditors PwC of a “material weakness” in its internal controls.

Analysts are predicting that AIG will be especially vulnerable if the credit crunch moves over into commercial loans, including commercial real estate. AIG say that further write-downs are possible, but that losses won’t have a material effect in the long term.