AIG Shares Plunge After Revealing $7.8 Billion Q1 Loss

May 9, 2008 2:00 p.m. EST

New York, NY (AHN) - American International Group Inc. (AIG), the world's largest insurer by assets, led the drop in the financial sector in European markets on Friday.

New York-based AIG stocks plunged in Germany by as much as 6.8 percent to $41.13 after it reported that the firm requires to raise additional $12.5 billion to shore up its capital position.

"Clearly, a capital raise of this size will be dilutive to future earnings, unless the company makes a clear case of how it might leverage it for future growth opportunities," Goldman Sachs's Cholnoky wrote in a note, according to the Associated Press.

While, shares of AIG shares on the New York Stock Exchange (NYSE) dropped by as much as $3.05 or 6.9 percent to $41.10 during Friday's morning trading session.

The insurer reported its first quarter net loss late on Thursday of $7.81 billion, while exposing $15 billion in pre-tax writedowns.

The earnings quarterly report also attracted downgrading of the company's credit grades by Standard & Poor's and Fitch Ratings.

"Despite the fact they saw the cracks starting to form, they continued the repurchase program through the end of the year," Joyce Sharaf, an analyst at A.M. Best Co. in Oldwick, New Jersey, told Bloomberg. "That was cash out of the door."

According to the company's financial statement, AIG United Guaranty lost as much as $352 million in operating income in the first quarter. AIG gave up around $9.11 billion in its credit-default swaps portfolio during the first quarter. However, the swaps will cover losses on $579 billion in bonds or other kinds of debt.

"Management capability issues, which have been smoldering for a while, are likely to flare up," David Havens, a credit analyst at UBS AG in Stamford, Connecticut, in a note to investors yesterday, told Bloomberg. "One of AIG's constant weaknesses has been its complexity. It's come back to bite them."