In a presentation to analysts and investors, the insurer says that although the majority of its mortgage insurance and residential loans are safe, delinquencies are becoming more common among borrowers in the category just above subprime.
AIG Chief Executive Martin Sullivan acknowledged the "significant declines" in subprime securities, but said the company’s strict underwriting standards had minimized losses and he was "poised to take advantage of opportunities" in the mortgage market.
William Nutt Jr., chief executive of AIG's mortgage insurance arm, said "We are experiencing stress in the Midwest markets where jobs have been lost and we are now seeing it in Florida and California." AIG said delinquency rates for first mortgages had risen to 3.98 percent in June from 3.56 percent in April and a low of 3.08 percent in July 2005. The company’s mortgage portfolio is divided into three categories: subprime, (borrowers with credit scores below 620); nonprime, (borrowers with credit scores of 620-659), and prime (borrowers with credit ratings above 660).
The loss ratio for first mortgages, which represents claims and expenses as a percentage of premiums, more than tripled in the second quarter to 84 percent from 26 percent a year ago. The total loss ratio -- including second mortgages -- nearly quadrupled to 130 percent. About 90 percent of the company’s domestic mortgage business is comprised of first mortgages. AIG noted total delinquencies in its $25.9 billion mortgage insurance portfolio were 2.5 percent, but it did not provide numbers for the previous year.
Earlier this week, AIG posted second-quarter earnings that included a pretax operating loss of $78 million in its mortgage insurance unit and a decline in earnings at its consumer finance division, which originates and invests in real estate loans. The decline was offset by higher premiums in life and property insurance, resulting in a rise in net earnings by more than a third to $4.28 billion, or $1.64 a share.
The market is "in a panic mode because the subprime crisis is spreading into other areas of the economy," notes Bill Hackney, a managing partner of Atlanta Capital Management. Nevertheless, Hackney says AIG will remain one of his largest holdings because the insurer has “the size and diversity to weather it."