AIG's Mortgage Woes Hit Hard
Insurance giant American International Group Inc. (AIG) said Wednesday after market close that it lost $5.36 billion during the second quarter, as mortgage-related exposure continued to chew away at the bottom line; speculation that the company will need to raise additional capital helped shares in the world's biggest insurer fall the most since the stock market crash in 1987 on Thursday morning, as a result. AIG said it wrote down the value of credit-default swaps by $5.56 billion before taxes in the second quarter; it also absorbed $6.08 billion in pre-tax write-downs to RMBS and other structured securities in the company's investment portfolio, citing a "severe, rapid declines in fair values." "Our second quarter results were adversely affected by the severe conditions in the housing and credit markets and a very difficult investment environment," said AIG CEO Robert Willumstad, who clearly faces an uphill battle to right the ailing insurer. "These results do not reflect the earnings power and potential of AIG's businesses and it is clear that we have a lot of work to do to restore AIG's profitability to where it should be." AIG holds $77.5 billion in primarily U.S. RMBS, with $60.9 billion of that total in non-agency securities; and in looking at the investment portfolio, it's clear that more losses could be in the offing. The company holds $23.6 billion in par value of subprime RMBS, which it has written down to $16.3 billion in fair value at the end of Q2; likewise, $24.6 billion in par of Alt-A RMBS has been written down to $16.4 billion in fair value. Those write-downs would seem likely to get much steeper in the coming quarter, given that the reason for current valuation levels was that at June 30, 94 percent of the company's non-agency portfolio held AAA or AA ratings -- as we've covered here at HW, Alt-A and even prime jumbo deals are seeing ratings slashed. Which will force further fair-value adjustments going forward. Speaking of prime jumbo, AIG holds $13.8 billion in such securities, as well, $11.6 billion of which was still rated AAA at the end of the quarter. The vast majority of RMBS exposure is in the 2006 and 2007 vintages, as well. Rating agencies began slashing ratings of Alt-A and prime jumbo deals on August 1, a move that isn't likely a coincidence. And we haven't even begun to discuss CDO exposure; AIG held $4.1 billion of CDOs in its portfolio at the end of the quarter, the majority of which were backed by bank loans as collateral (known as CLOs). And we also haven't discussed monoline exposure, which totals $41 billion, almost all of which is in the form of financial guarantees. AIG held $7.7 billion in monoline exposure tied to ABS, RMBS and CMBS at the end of the second quarter. Mortgage insurance Outside of investments, AIG's United Guaranty mortgage insurance business unit is facing difficulties as well; total 60 day delinquencies rose to 4.9 percent of $31.8 billion domestic mortgage risk in force during Q2, up from 4.0 percent one quarter earlier and 2.5 percent one year ago. Telling is that early returns on the 2008 vintage look similar to 2007's trajectory at United Guaranty; the company reported a 60+ delinquency rate of 0.7 percent on $3.8 billion in the 2008 vintage, compared to a 0.7 rate on $3.7 billion underwritten in the 2007 vintage at the same time last year. Perhaps even more telling is that delinquencies on interest only and option ARM mortgages -- 17 percent at the end of the second quarter -- are far worse than delinquencies in low-doc loans, which registered 6 percent. More pain could lie ahead in the form of second liens: United Guaranty holds $3.5 billion net risk-in-force in seconds, and so far has seen only 1.6 percent go delinquent -- yet 44 percent of losses incurred during the quarter were tied to domestic second liens. It's not hard to figure out why, either; a borrower default when a second lien is involved usually entails 100 percent (or greater) loss severity. And it's a safe bet at this point that delinquencies in second liens will rise significantly from the 1.6 percent level recorded during Q2. Related links: investor presentation Disclosure: The author held no positions in AIG when this story was published; indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.