AIG Chief Faces the Music

The insurer reported an overall loss for the period of $7.81 billion, or $3.09 a share, compared with earnings of $4.13 billion, or $1.58 a share, during the year-ago period. AIG's results caught Wall Street off guard again. Analysts, on average, had expected a loss of 76 cents a share, according to consensus estimates reported by Thomson Reuters. In the lead-up to the report on Thursday, Standard & Poor's analyst Catherine Seifert slashed her earnings estimate for the Dow component to an operating loss of $1.10 a share, down from her previous estimate for earnings of $1.22 a share.

The losses sent major stock indices tumbling on Friday as investors contemplated more rounds of heavy losses for the financial sector amid the downturn in the U.S. housing market and its fallout in the credit markets. AIG's predicament also raised the specter of financial pain spreading into the insurance industry, where mortgage-related losses have so far been relegated to monoline insurers like MBIA and Ambac (ABK Quote) and reinsurance giants like Swiss Re.

AIG's performance stands out, however, because the company assured investors in December that it had "little to no exposure" to asset-backed commercial paper, structured investment vehicles or collateralized debt obligations tied to residential mortgage-backed securities. It later disclosed in a regulatory filing that its auditor, PricewaterhouseCoopers, concluded it had "a material weakness in its internal control" related to its accounting for derivative securities.

In mid-February, AIG reported a fourth-quarter loss of $5.3 billion, thanks in part to a pretax charge of $11.12 billion on its super senior secured credit default swap portfolio. Despite early warnings, the charge surprised Wall Street and sent shares of AIG tumbling while Sullivan declared that the company was in "uncharted waters." Joe Cassano, the head of AIG Financial Products, announced he would retire at the end of March.