AIG Rebuilding After $7.8 Billion Loss

During an analyst's conference call, Steven J. Bensinger, who moved from his position as AIG chief financial officer to vice chairman-financial services on the same day, said the financial environment that caused the crisis is "expected to continue for some time" and the economic stress "is not over."

Mr. Sullivan, AIG's president and chief executive officer, said the company felt the investments it made were "prudent," but it is making adjustments in its investment portfolio.

In view of the losses and a reported deterioration in insurance underwriting revenue, he said AIG will seek to hike rates and tighten underwriting going forward.

Chris Karow, a partner for Ernst & Young, said the investment-related losses that AIG and other insurers are experiencing are a result of an accounting system that is forcing companies to take impairment charges when securities fall below a percentage of value for a given length of time. The depressed market, resulting from the subprime mortgage crisis, is having a devastating effect on company balance sheets, and a change in direction does not appear to be in the offing soon.

"Unless the markets recover dramatically over the next couple of months, much of that other than temporary impairment will likely go through the income statement in the next quarter," observed Mr. Karow. He explained that "other than temporary impairment" is the accounting term used for securities losses.

He noted that AIG is not the only insurer suffering from these accounting charges, but the large loss number, coupled with AIG's diverse portfolio of financial vehicles, brings a higher profile to it financial statements.

Despite the first-quarter losses, Mr. Sullivan called AIG's underlying business solid, noting that the losses occurred primarily in its lending and investment segment.

For its property-casualty business, AIG reported first-quarter net premium written remaining relatively flat at $12.1 billion. Still, operating income in the segment fell 57 percent to $1.34 billion, AIG said, attributing the drop to declines in underwriting and investment income. AIG's combined ratio rose 9.3 points to 96.9.

The earnings announcement was not the only news the company made that day, with a decision to raise its quarterly cash dividend by 10 percent to 22 cents per share.

At the same time the company said it would raise $12.5 billion in capital in response to the two quarters of losses, having posted a $5.3 billion net loss in the fourth quarter of 2007.

"We think it is absolutely the right thing to do though dilutive in the short term," said Mr. Bensinger in defense of the decision.

"The dividend increase is a reflection of both the board's and management's long-term view of the strength of the company's business, earnings and capital generating power," said Mr. Sullivan.

Reacting to the first-quarter results, Standard & Poor's and Fitch Ratings both lowered holding company credit ratings one notch and placed them on credit watch.

In the days that followed, AIG faced rumors that one of its subsidiaries, International Lease Finance Corp., a major airline leasing business, was considering going its separate way. The reason, cited by reports originating in the Wall Street Journal, was that ILFC's chief executive was unhappy with the prospect of rating downgrades that would make borrowing more expensive, increasing the cost of leasing and making his company less competitive.

Then came Mr. Greenberg's letter.

The annual meeting postponement, he wrote, was necessary to allow shareholders time to digest AIG's plan to increase its dividend and raise capital in the face of two losing quarters.

Shareholders need time to "give careful thought to how best to move AIG forward," the letter said.

He said the write-downs led to "a complete loss of credibility with the investment community and even further loss of value for shareholders."

In an interview on CNBC's Kudlow & Company shortly before the meeting, which he did not attend, Mr. Greenberg reiterated the remarks in the letter, emphasizing that the recent performance was the worst the company has suffered in its 40-year history. He blamed the results on a change in the company's culture that is poorly managing its investment portfolio and allowed for an explosion in its expense ratio with the addition of 24,000 employees–"the equivalent of two Army divisions."

He did not blame Mr. Sullivan directly for the company's poor showing.

Mr. Greenberg went on to say that he was not responsible for getting the company into the investments that led to the write-downs, arguing that the portfolio was not properly managed after he left in 2005 under allegations he and others in the company were engaged in a fraudulent finite reinsurance contract.

"To say this happened on someone else's watch is ridiculous," he said.

He was also critical of the company's plan to increase its dividend while raising capital, saying the company failed to explain its rationale for doing this and the move unnecessarily diluted shareholder value.

During the annual meeting, one shareholder echoed some of Mr. Greenberg's concerns, saying that the company was "headed precipitously in the wrong direction" and asking what management was doing to restore investor confidence.

Mr. Sullivan said the firm was maintaining a disciplined approach to expenses, and noted that its insurance companies did not suffer downgrades, reflecting their healthy position.

He said no one in management was pleased with the results, but the management team expected to see improvements. The fundamental business performance of the company remains sound and its strength is intact, he said.

He defended the increase in staffing, noting that it was just over 5 percent of the workforce and that some of that staff increase was related to compliance and internal audit personnel needed in the wake of regulatory investigations dating back to the days before his leadership role began.

One issue remaining is what the future will bring.

Mr. Greenberg said it was not clear how much more the company stands to write down, saying it could go as high as $11 billion, though AIG executives said it could be far less.

Ernst & Young's Mr. Karow said AIG has revealed a lot of information, something analysts noted during the company's conference call, and that it may have put a huge bulk of potential write-downs behind it, reflected in such a significant loss figure. However, proportionally, AIG can survive this hit to its bottom line and prosper.

The question for the rest of the insurance industry is how many other companies will be reporting significant losses in the future from write-downs, he said.

"The cumulative impact [on the insurance industry] will be a significant drag on earnings," observed Mr. Karow, noting his observations applied to all insurers, property-casualty and life-health insurers alike. "The industry has given back a lot of capital and there is not as much excess capital as there was. This has created more stress and pressure, but not enough to blow companies up," he said.

(Additional reporting by Daniel Hays)

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