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AIG profit jumps despite losses in mortgage unit

Domestic property and casualty coverage operations post gains.

August 09, 2007|From Reuters

American International Group Inc. reported a 34% jump in second-quarter profit Wednesday despite a $78-million operating loss in its mortgage insurance unit caused by weakness in the U.S. housing market.

The New York-based company, the world's largest insurer, sought to calm investors' nerves about its exposure to the home mortgage market, but some analysts remained concerned.

"We continue to be very comfortable with our exposure to the U.S. residential mortgage market, both in our operations and our investment activities," Chief Executive Martin Sullivan said in a statement.

Second-quarter net income increased to $4.28 billion, or $1.64 a share, from $3.19 billion, or $1.21, a year earlier.

The loss in AIG's mortgage unit compared with a $110-million operating profit a year earlier.

Delinquencies and defaults on second mortgages, a category that includes home-equity loans and lines of credit, were the major contributors to the mortgage unit's poor performance in the latest quarter, but losses on policies covering primary home loans also rose, AIG said.

"Everyone's looking at their sub-prime exposure, and they didn't do very well," said Morningstar analyst Matt Nellans.

He said the mortgage unit's loss ratio was 318%, meaning the amount AIG paid out on mortgage policies was three times as much as it collected in premiums on such policies.

It could have been worse, said Paul Newsome, an analyst with A.G. Edwards: "We are not seeing the devastating losses some had feared. In fact, the bottom line was better than expected."

AIG said its overall profit excluding certain items was $4.63 billion, or $1.77 a share, up from $4.16 billion, or $1.58, a year earlier. On that basis, the earnings beat the $1.62 a share estimated on average by analysts.

It also reported lower operating profit for its consumer finance arm. The percentage of the unit's loans in delinquency and the percentage written off increased, but AIG attributed that to "maturing of the portfolio" and said those ratios were "stable and near historic lows."

The results were released after the close of the markets. AIG shares rose 93 cents to $66.48 and gained an additional 18 cents during after-hours trading.

Overshadowing the profit declines in mortgage insurance and consumer finance were increases in AIG's domestic property and casualty arm, with operating earnings up 30% to $1.98 billion, and its life insurance business, whose operating profit rose 14% to $2.9 billion.

Asset management income rose 5%, including a $398-million after-tax gain on the sale of part of AIG's investment in Blackstone Group, which went public in June.

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