Analysts said AIG's woes were symptomatic of broader problems in financial services, but that it was still nothing to sneeze at -- and there could be more bad news in the pipeline.
"It would be folly to see the write-down as the absolute truth regarding their likely claims, but it would be folly to ignore it," Morningstar analyst Matt Nellans said.
AIG, a multi-line carrier offering property, commercial and life insurance worldwide, said its adjusted fourth-quarter loss -- excluding capital gains, losses and hedging activity -- was $3.2 billion, or $1.25 a share, widely missing expectations.
The fourth-quarter results included a pretax charge of $11.12 billion for a net unrealized market valuation loss related to its credit default swap portfolio.
Analysts, on average, expected a loss of 15 cents, according to Reuters Estimates. In the year-ago quarter, New York-based AIG earned $3.85 billion, or $1.47 a share, from operations.
The insurer said it expects the bulk of its write-down to be recouped over time, but a small portion was more seriously impaired, leading the company to record it as a loss.
In total, AIG recorded net realized pre-tax capital losses of $2.63 billion -- including $643 million in charges resulting from bad mortgage debt.
Chief Executive Martin Sullivan moved to assure investors that while the results were "clearly unsatisfactory" and the company did not rule out more write-downs, AIG did not expect the portfolio deterioration to be material in the long run.
"During 2008, we expect the U.S. housing market to remain weak and credit market uncertainty will likely persist," he said in a statement.
Donn Vickrey, an analyst at the research firm Gradient Analytics said, "There is a reasonable likelihood that there is going to be some (more) impairment. The company is saying that while these are paper losses, not real losses -- I don't think we know that yet.
"By the end of 2008, it could very well be worse," he added.
Investment banks around the world have written off more than $140 billion because of the subprime mortgages crisis and the credit crunch roiling the markets.
Analysts said AIG's could take another hit from the credit crisis if it extends to commercial loans, including commercial real estate.
AIG shares fell 2.6 percent to $48.83 in after-market trading, after losing 4 percent in regular trade on Thursday. The shares are off their five-year low.
The $11.12 billion disclosed on Thursday was for the three-month period, including December.
CEO REPORT CARD
AIG's fourth-quarter loss marred Sullivan's track record of turning a profit in every quarter since he was installed as CEO almost three years ago, replacing Maurice "Hank" Greenberg who quit after 37 years at the insurer's helm, under the cloud of an accounting scandal.
Analysts were sympathetic of Sullivan's plight, saying many executives were caught off guard by the credit crisis -- and he had inherited a thorny situation. Early in his tenure, Sullivan negotiated a restatement and $1.6 billion legal and regulatory settlement, allowing AIG to move past allegations of mis-accounting and kickback payments to brokers.
Now AIG is embroiled in another accounting scandal. Its auditors cited "material weakness" in the insurer's internal controls.
"He (Sullivan) inherited a difficult situation, but it has been made worse by his not communicating on a more timely basis, and clear fashion to Wall Street the risks that they face," said Gradient's Vickrey.
But the misstep isn't enough to push him out of the job, according to Charles Lieberman, chief investment officer of Advisors Capital Management LLC in Paramus, New Jersey .
"I'm comfortable with him (Sullivan) continuing," Lieberman said. "So much of what is happening is a function of the turmoil in credit markets which I think caught most of these guys by surprise -- its market valuations that don't make any sense."
(Additional reporting by Dan Wilchins, Chris Sanders; editing by Leslie Gevirtz and Braden Reddall)
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