market fiasco that has decimated profits of countless big-name
banks has made its presence painfully felt in the results of
American International Group (AIG), the world’s largest insurer in
terms of assets. With its fourth-quarter 2007 results decimated by
subprime-related realised losses of $2.63 billion ($1.71 billion
after tax) and impairment charges of $11.47 billion ($7.46 billion
after tax), AIG reported a fourth-quarter net loss of $5.29
billion, the biggest quarterly loss in the company’s 99-year
history. Net earnings for the full year tumbled to $6.2 billion,
55.9 percent lower than in 2006.
The primary source of AIG’s mammoth fourth-quarter charges and
losses were guarantees its AIG Financial Products unit has written
on collateralised debt obligations (CDO), many of which include
subprime mortgages. AIG had guaranteed CDOs totalling $62.4 billion
as at 30 September 2007.
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Optimistically, AIG said in its results statement that it believed
unrealised market valuation losses would reverse over the remaining
life of the impaired assets. However, in a conference call a day
after releasing its results, AIG CEO Martin Sullivan conceded: “We
are in uncharted waters.”
How many more unpleasant subprime surprises lie in wait in the US
insurance industry remains to be seen. However, it is notable that
AIG’s impairment charge exceeded an estimate made in early February
by rating agency Fitch that the US life insurance industry’s
unrealised subprime-related losses would total between $7 billion
and $8 billion at the end of 2007. Fitch forecast that the industry
would report total fourth-quarter pre-tax realised subprime-related
losses of between $2 billion and $3 billion, the latter figure
almost attained by AIG on its own.
Disturbingly, Fitch also warns that this year the subprime ride
could become even rougher for insurers. On 1 February 2008 Fitch
placed $139 billion of 2006 and 2007 vintage subprime mortgage
securities on Rating Watch Negative. The decision, said Fitch, was
based on its expectations of higher levels of delinquencies,
defaults and losses upon liquidation of properties.
According to Fitch, about 29 percent of the US life insurance
industry’s total adjusted statutory capital was exposed to subprime
residential mortgage-related investments in the aggregate as of 30
September 2007.
More importantly, added Fitch, life insurance industry exposure to
subprime investments rated A or below accounted for only 1.8
percent of total adjusted statutory capital. But while exposure of
most life insurers was below 1 percent of total adjusted statutory
capital, and some even at zero, in certain instance exposure is at
almost 20 percent. In Fitch’s rating hierarchy, an A rating is
awarded when credit quality is high and capacity for payment of
financial commitments is considered strong.
