AIG Sees Minor Exposure To Subprime Loan Market

Executives at American International Group went to great lengths to assure the markets that its exposure to the subprime mortgage market is minimal and the company closely scrutinizes its investment portfolio for quality.

The New York-based insurance carrier released its second-quarter results after the markets closed yesterday, reporting an increase in net income for the quarter of 34 percent, or more than $1 billion, compared with the same period last year.

Net income stood at $4.3 billion, or $1.64 per share (up 43 cents per share), beating analyst estimates of $1.61 per share listed on Yahoo! Finance.

For the first half of the year, net income increased 32 percent over last year, or more than $2 billion, to $8.4 billion. Earnings per share rose 32 percent (78 cents) to $3.21 per share.

Property-casualty insurance book net premium written rose 4 percent ($505 million) to $12.1 billion for the quarter.

For the first half, net premium written increased 6 percent ($1.4 billion) to $24 billion.

AIG's combined ratio in the quarter rose 0.65 to 87.12, but dropped 0.5 points to 87.32 for the first half.

During an analyst conference call today, Martin J. Sullivan, the carrier's president and chief executive officer, credited the performance of the p-c sector to growth in its brokering book and solid performance in its investment portfolio.

Executives said during the call that the insurance book is experiencing competition in the midst of the soft market, with some lines off as much as 10-to-15 percent–especially directors and officers and other liability insurance.

Globally, property is competitive, while other lines appear to be flat. Mr. Sullivan noted that aviation is “very competitive.”

The focus of today's conference call, however, was on AIG's investment portfolio–concentrating on the subprime mortgage market.

In the housing area, executives said the company is involved in a combination of lending, insurance and investments.

Executives emphasized that the company's interests in the mortgage market are carefully monitored and reviewed. Its exposure to the subprime market–mortgages issued to homeowners whose credit is questionable–is minimal.

AIG's investments in mortgage securities are concentrated in highly-rated vehicles with low exposure to the subprime market. For AIG's earnings to be affected, the housing market would have to reach Depression-era defaults, amounting to 45-to-60 percent, said one executive.

“Our exposure to the market is prudent,” said Robert E. Lewis, senior vice president and chief risk officer.

“AIG remains a safe haven in stormy waters,” said Mr. Sullivan, adding that the company is watching for opportunities that will develop as the turmoil in the housing market subsides.