Write-downs by big insurers spook analysts and investors

There is no end in sight to turbulence in global financial sector, writes Proinsias O'Mahony.

TURMOIL IN the beleaguered global financial sector continued yesterday after two of the world's biggest insurers declared further subprime-related write-downs and American behemoth Citigroup announced plans to offload as much as $400 billion (€259 billion) in non-core assets.

AIG, the world's biggest insurer, shocked analysts by reporting a first-quarter loss of $7.8 billion. The company, which just a year ago was riding high after returning profits of more than $4 billion, also admitted that it plans to raise $12.5 billion after suffering pre-tax write-downs of $15 billion.

Pressure is growing on chief executive Martin Sullivan to join the growing list of financial chiefs forced to walk the plank. In December, Sullivan assured investors that total write-downs, which have now exceeded $19 billion, would be "manageable". He offered a similarly reassuring tone just two months ago, saying that rules that required the company to estimate the present market value of contracts sold to protect investors were making losses seem worse than they were in reality.

The chief executive portrayed such losses as temporary and predicted a figure of $900 million as being the worst-case scenario. Yesterday, that had ballooned to $2.4 billion, with Sullivan admitting that he was "surprised" by the magnitude of the losses and was under "no illusions about the challenge ahead". That caution was echoed by vice-chairman Steven Bensinger, who said he could offer "no assurance" in relation to future write-downs. Rating agencies Standard Poor's and Fitch subsequently cut AIG's credit ratings, contributing to a one-day fall of 8 per cent for the insurance giant.

Allianz, Europe's biggest insurer, compounded the industry's woes after announcing sub-prime related write-downs of €845 million. Shares fell by 2 per cent, with chief financial officer Helmet Perlet saying that "it is hard to predict when the stormy weather will end". Perlet said 2008 would be "challenging" and that "the longer this environment persists, the harder it will also be to achieve our medium-term outlook".

Global financial write-downs now exceed $321 billion.

The subject of credit-related write-downs is also occupying the mind of Citigroup chief executive Vikram Pandit. At an analyst meeting yesterday, Pandit said the group planned to "wind down" up to $400 billion of non-core assets and to slash operating costs by $15 billion - a cut of 25 per cent.

The credit crunch has been very tough on Citigroup, which has already been forced to raise more than $40 billion from investors after enduring write-downs of more than $45 billion. The share price, which has fallen by almost 55 per cent over the last year, was largely unchanged on the news.

Yesterday's confluence of bad financial news stories, coupled with the price of oil surpassing $126, saw global markets tumble. Nevertheless, markets are well off the lows seen in mid-March, with the SP 500 rebounding by over 12 per cent between then and the beginning of May. This rise has been sparked by growing optimism that the collapse of Bear Sterns marked the culmination of the credit crunch. Yesterday's news is likely to be seized upon by bearish observers who see the recent rise as a "suckers' rally".

The latest poll from the American Association of Individual Investors (AAII) reveals 53 per cent of investors describe themselves as bullish, with just 25 per cent in the bearish camp. This is the most optimistic reading since the market's high last October, when a double-digit rise caused bullish juices to get flowing. In March, just as markets were bottoming, those figures were reversed as panicky investors headed for the hills.

Those kind of iffy predictions have earned the AAII polls an unenviable reputation as a "dumb money" indicator. In contrast, hedge fund investors are pessimistic, with a poll published by Deutsche Bank this week showing that more than 80 per cent of those surveyed are bearish for 2008. While those polled control nearly $1 trillion in hedge fund assets, it's worth noting that it was carried out in March, when fear was gripping markets.

More recent data suggests that professionals do not share the optimism shown by ordinary investors, however. Options traders have grown increasingly suspicious of the recent rally and are paying for insurance that would lock in gains in the event that the SP 500 drops by 10 per cent or more over the following three months. The current differential between traders betting on a 10 per cent index fall as opposed to a 10 per cent rise is the widest in three years.