While predicting housing market losses will continue through next year, executives at American International Group Inc. said it has no plans to abandon its mortgage-related investments, even though losses in that area played a major role in the company's third-quarter profit decline.
"Despite a period of adjustment and volatility, our exposure is appropriate for a strong world leader in insurance," Robert E. Lewis, AIG's chief risk officer, said during its quarterly earnings call Thursday. The "downward cycle" will continue to affect its results for the "foreseeable future," and AIG will face operating losses next year.
AIG said it expected to report it had accrued $550 million of additional losses from its credit-related businesses through the end of October.
Martin Sullivan, AIG's president and chief executive officer, said the housing market will continue to deteriorate through next year, but AIG's "business model and strict underwriting approach are sound, allowing the company to pursue opportunities" with its lending businesses.
The New York insurer's net income fell 26.8% from a year earlier, to $3.09 billion, or $1.19 a share, in large part because of exposure to the subprime mortgage market. Its $872.3 billion investment portfolio lost $864 million, its credit-swap portfolio lost $352 million, and its mortgage insurance business lost $215 million.
Revenue increased 2% to $29.84 billion. Analysts surveyed by Thomson Financial expected, on average, a profit of $1.62 a share on revenue of $29.91 billion.
AIG took a pretax charge of $352 million, or $229 million after taxes, for an unrealized market-valuation loss related to AIG Financial Product Corp.'s super senior credit default swap portfolio, but the company said it does not expect to have to make payments on the derivatives.
Despite these losses, analysts seemed surprisingly upbeat about the company. Donald Light, a senior analyst with Celent LLC, wrote that AIG's quarterly results were "disappointing, but not disastrous," despite the credit market-related losses and a 19.1% decline in its operating income from its life and retirement services unit.
"AIG is still mostly a very big insurance company," he wrote. "On that side of its operations, investors can take heart at respectable growth in the general insurance group's premiums written of 5.3%, and only a moderate deterioration in underwriting performance."
Nigel Dally, an analyst at Morgan Stanley, wrote that though the fourth-quarter results "will likely remain under pressure, we believe that significant bad news is already reflected in the stock."
By midday Thursday shares of AIG had dropped 3.11%, to $56.10.
Analysts said AIG's investment portfolio includes some collateralized debt obligations, but it has less exposure than companies such as Citigroup Inc. and Merrill Lynch & Co., because AIG exited the subprime business in 2005.
Jimmy Bhullar, an analyst at JPMorgan Chase & Co., wrote AIG's remaining subprime exposure is manageable. "Strong results in the foreign life and property and casualty divisions should offset weakness in domestic life, capital markets, and consumer finance."
Mr. Sullivan said, "While U.S. residential mortgage and credit market conditions adversely affected our results, our active and strong risk management processes helped contain the exposure. Our balance sheet remains strong, with the financial resources to weather continued uncertainty as well as to take advantage of attractive market opportunities as they emerge."
