AIG posts record fourth quarter loss of $5.3bn

AIG, the world’s largest insurer, has posted record losses of $5.3bn in the fourth quarter of 2007.

The loss was the result of an $11.1bn write-down of a credit swap portfolio in its financial products unit, triggered by the sub-prime mortgage crisis.

The insurer also saw its annual net income fall by 56% to $6.2bn.

It reported a fourth quarter loss of $184m in its personal lines business, following a $175m hit from the wildfires in California.

Chief executive Martin Sullivan described the insurer as being in “unchartered waters”. He added that the company had taken steps to rectify the valuation of its derivative portfolio which had led to auditors PwC warning last month of a “material weakness” in the company’s internal controls.

Analysts predicted AIG could be vulnerable should credit crunch carry over into commercial loans, including commercial real estate. The company said that further write-downs were possible, but added that the losses would not have a material effect in the long term.

In a related development, Joe Cassano, head of AIG Financial Products, is leaving the company. He will continue to work with the insurer as a consultant.

The insurer’s combined operating ratio increased by two per cent in the fourth quarter from 87.74% to 89.56% year on year. The company said this was "primarily due to increases in the expense ratio, which included costs for realigning certain entities, principally in the UK."

The company said its adjusted loss in the fourth quarter – excluding capital gains, losses and hedging activity – was $3.25bn, missing analysts’ forecasts.

More promisingly, net premiums written in the fourth quarter rose by 5.8 per cent year on year, driven by growth in primary and excess casualty lines in the corporate sector, and accident & health in multiple regions.