Much like the movie Groundhog Day, we seem to be reliving the same quarterly report over and over again from every large financial company.
AIG (NYSE: AIG), the world's largest insurer, posted its second straight record quarterly loss, caused by a massive writedown of derivatives exposed to bad mortgage investments. Furthermore, the company -- surprise! -- plans to raise billions in additional capital to shore up the balance sheet. What else is new?
How ugly was it?
After the market closed on Thursday, AIG reported a quarterly loss of $7.81 billion, or $3.09 per share, versus a gain of $4.13 billion, or $1.58 per share, for the same quarter last year. These results considerably trailed the average analyst forecast of a $0.76-per-share loss. As a result, the stock fell more than 8% in Friday's trading.
The insurance company took a $9.11 billion charge for unrealized market-value losses on credit swaps -- an admitted improvement over last quarter's $11.12 billion in losses. The most recent charge covered losses on a $579 billion portfolio of bonds and other debt, and a $6.09 billion charge in its investment portfolio.
What are they gonna do about it?
As a result, the company announced a $12.5 billion capital raising to fortify its balance sheet, comprising a $7.5 billion offering in common stock and equity units and a $5 billion offering of fixed-income securities.
AIG's massive writedowns, combined with those of Citigroup (NYSE: C), UBS (NYSE: UBS), Wachovia (NYSE: WB), Merrill Lynch (NYSE: MER), Bank of America (NYSE: BAC), and others, contributed to a whopping total of $300 billion so far in the worldwide credit crisis, according to analysts' estimates. The AIG report and the price of oil helped the overall market sell off on Friday, amid fears that credit crisis-related losses may linger.
What about its regular business?
AIG's quarter stunk, even without the huge writedowns. The company earned $0.93 per share, excluding items, falling well below Reuters' $1.48 forecast. Because of the slow economy, the insurance-writing business was flat. In fact, the combined ratio -- how much the company earns on premiums, versus what it pays out in claims and other expenses -- rose to 96.86, from 87.52 a year ago. A number greater than 100 means the company is spending more than it earns in premiums.
What does all this mean?
AIG stock has endured massive losses in the last two quarters, with no end in sight. Shares have fallen 44% from their 52-week high, and they're still plunging. The aforementioned massive losses have reduced shareholder equity by 17% in just this last quarter alone. And -- lest we forget -- the economy stinks.
The company tried to address shareholder concerns by raising its quarterly dividend by 10% to $0.22 per share. This is a strange move, considering that the company is simultaneously undergoing a massive equity offering that will dilute existing shareholders. William Smith, chief executive of Smith Asset Management, called this paradox "one of the craziest things I've ever seen in my life."
AIG has a long way to go before it can work through this crisis. This quarter disappointed even Wall Street's low expectations. AIG will be a good company again -- but judging from this quarter, it might take awhile.
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