American International Group reported a second-quarter loss of $5.36 billion, attributing the poor results to the weak U.S. housing market and the softening property-casualty insurance market.

The New York-based insurer saw its bottom line go from net income of $4.28 billion ($1.64 a share) in the second quarter of 2007 to a loss of $5.36 billion ($2.06 a share). Consolidated total revenues dropped 36 percent--from $31 billion to $20 billion.

For the first half, AIG's net loss was $13 billion ($5.11 a share), compared to $8.4 billion in net income ($3.21 a share) for the same period last year. Revenues fell 45 percent from $62 billion to $34 billion.

The weak housing market was blamed as the primary driver for the poor earnings results, the company said, with its heavy investments in collateralized debt obligations, mortgage-backed securities, load defaults and declines in investments.

Operating income for general insurance operations fell 72 percent, going from $3 billion to $827 million in the second quarter. Given the soft p-c insurance market, there was only a slight increase in AIG's net premiums written of $81 million, leaving the total virtually unchanged at $12 billion. Meanwhile, the combined ratio deteriorated 10.59 points to 97.71.

For the first half, operating income dropped 64 percent, going from $6 billion in 2007 to $2.2 billion. Net premiums were $24 billion--an increase of just $55 million--while the combined ratio rose 10 points to 97.32.

Other AIG sectors--life, financial services and asset management operations--all reported losses.

The company's poor results were primarily a product of a concentration of risk in the housing market and related financial instruments, AIG's chairman and chief executive officer, Robert B. Willumstad, said during a conference call with analysts.

Executives were hard pressed to say when the company would see a turnaround in its performance. The troubles in the housing market are expected to continue through next year, when some stability might return to the sector, they said.

In its filing with the Securities and Exchange Commission, AIG said it participates in the U.S. residential mortgage market through American General Finance Inc. and United Guaranty Corp., which provide mortgages.

AIG insurance and financial services subsidiaries also invest in mortgage-backed securities and collateralized debt obligations, and the company is involved in that market through AIG Financial Products Corp., AIG Trading Group Inc. and their subsidiaries, which provide credit protection through credit default swaps on certain super senior tranches of CDOs.

The company noted it could see claim increases in directors and officers and professional liability lines related to residential mortgage and credit default markets.

Mr. Willumstad indicated that the company will be going through some restructuring, the details of which will be announced on Sept. 25 at the company's stockholder meeting. "A less complex AIG will be a better competitor," he said.

"AIG is a great company, but it is facing a lot of challenges," he added. "We are committed to building shareholder value."

Alain Karaoglan, an analyst with Bank of America Securities, said in an investors note that AIG's operating earnings were weaker than expected, and speculated that the company may be forced to raise additional capital. He noted the loss per share of 51 cents was below street estimates of income of 63 cents a share.

Weather-related losses and soft market pressures also hurt results in the property-casualty insurance sector, he noted.

However, he maintained a "Buy" rating on AIG, saying that significantly larger losses were contemplated, while adding that if Mr. Willumstad "can institute lasting changes" at AIG, that would increase future shareholder value.

Special Reports /

AIG Second-Qtr. Loss Tops $5M

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