Troubled residential mortgage and credit markets hurt American International Group Inc.’s third-quarter profit. Net income fell 27 percent compared to the third quarter last year. The giant insurer reported losses in its investment portfolio, credit-swap portfolio and mortgage-insurance business.
Net income for the third quarter of 2007 was $3.09 billion or $1.19 per diluted share, compared to $4.22 billion or $1.61 per diluted share in the third quarter of 2006.
Third quarter 2007 adjusted net income was $3.49 billion or $1.35 per diluted share, compared to $4.02 billion or $1.53 per diluted share in the third quarter of 2006.
Included in both third quarter and nine months 2007 net income and adjusted net income was a charge of approximately $352 million pretax ($229 million after tax) for a net unrealized market valuation loss related to AIG Financial Product Corp.’s (AIGFP) super senior credit default swap portfolio.
AIG said it continues to believe that it is “highly unlikely” that AIGFP will be required to make payments with respect to these derivatives.
Commenting on the third quarter’s results, AIG President and Chief Executive Officer Martin J. Sullivan said that the company could handle the mortgage conditions. “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.”
While the mortgage guaranty business reported an operating loss in the quarter, the company’s domestic brokerage, aircraft leasing and asset management reported operating income growth. General insurance and life insurance operating income declined.
General insurance third quarter 2007 operating income declined 3.4 percent to $2.51 billion compared to the third quarter of 2006.
Improved underwriting results in the Domestic Brokerage Group were offset by a $215 million operating loss in the Mortgage Guaranty business and declines in operating income in the Personal Lines and Foreign General businesses.
The third quarter 2007 combined ratio was 90.17, compared to 89.10 in the third quarter of 2006.
Third quarter 2007 General Insurance net investment income increased 1.8 percent compared to the third quarter of 2006, which included $213 million of income for an out of period adjustment for unit investment trusts and partnership income.
Domestic Brokerage Group third quarter 2007 operating income was $1.89 billion, an increase of 24.5 percent compared to the third quarter of 2006. Improved underwriting results reflect favorable loss trends in recent accident years across most lines of business. Third quarter 2007 net premiums written declined slightly to $6.01 billion compared to $6.07 billion in the third quarter of 2006. Premium growth in risk management, accident & health and program business offset the effects of increasing competition and rate declines in property and most casualty lines.
Personal Lines third quarter 2007 operating income was $28 million compared to $133 million in the third quarter of 2006. The decline in operating income was due primarily to unfavorable loss reserve development in prior accident years from discontinued businesses, together with transaction and integration costs related to the acquisition of the minority interest in 21st Century Insurance Group. Net premiums written increased 7.8 percent compared to the third quarter of 2006, the result of continued growth in the AIG Private Client Group and stronger growth in Agency Auto and aigdirect.com, its newly combined direct auto business.
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