May 9 (Bloomberg) -- American International Group Inc. , the world's biggest insurer by assets, said it needs to raise $12.5 billion after two straight quarterly losses as pressure builds on Chief Executive Officer Martin Sullivan.

AIG fell 8.3 percent to $40.50 in early trading at 7:27 a.m. in New York after the company reported a first-quarter net loss yesterday of $7.81 billion, compared with earnings of $4.13 billion a year earlier. The New York-based insurer disclosed more than $15 billion in pretax writedowns, prompting Standard & Poor's and Fitch Ratings to cut the company's credit grades.

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

Shareholders are suffering, with AIG down 24 percent this year. The decline came after Sullivan, 53, reassured investors in December that writedowns would be ``manageable.'' The insurer has since reported more than $19 billion in losses from contracts sold to protect fixed-income investors and said more are possible, causing analysts to question how much longer Sullivan's three-year tenure as CEO will last.

AIG wrote down contracts it had sold to protect investors by $9.11 billion in the first quarter to comply with rules that require the company to estimate their present market value. Sullivan said as recently as March that those losses were temporary, and the actual amount in a worst-case scenario might be $900 million over a period of years. Yesterday, AIG said the losses might reach $2.4 billion.

Subprime Securities

Company executives have scheduled a conference call for 8:30 a.m. New York time to discuss the results.

AIG's financial products business guaranteed more than $460 billion of assets for fixed-income investors at the end of March, including $60.6 billion in securities tied to subprime mortgages.

``Any CEO is always under pressure to perform,'' said AIG spokesman Chris Winans. ``In terms of any implication of a deadline to achieve a certain goal or some kind of ultimatum, I'm not aware of anything being talked about.''

AIG, headed by Sullivan since he replaced Maurice ``Hank'' Greenberg in 2005, has units that originate, insure and invest in home loans. The insurer wrote down its investment portfolio in the quarter by $6.09 billion as borrower defaults forced down the value of mortgage-backed securities.

Credit Losses

``Their appetite for risk was excessive,'' said Joyce Sharaf, an analyst at A.M. Best Co. in Oldwick, New Jersey. ``They said, `We can take the risk, we have a strong balance sheet.' Well, it blew a hole through their balance sheet.''

The world's largest financial institutions reported at least $321 billion in asset writedowns and credit losses tied to the U.S. housing slump. Banks and securities firms have raised or announced plans to seek $245 billion since July to replenish capital depleted by the collapse of the U.S. subprime market, according to Bloomberg data.

The rout has led to CEO departures at some of the largest financial firms, including Citigroup Inc.'s Charles O. ``Chuck'' Prince and Merrill Lynch & Co.'s Stan O'Neal. Wachovia Corp. stripped CEO Kennedy Thompson of his role as board chairman yesterday.

Excluding capital losses and the change in the value of some derivatives, AIG's first-quarter loss was $1.41 a share, missing the average 34-cent loss estimate of 17 analysts surveyed by Bloomberg. AIG, founded in 1919, hasn't had two consecutive quarterly losses since its initial public offering in 1969.

Raising Capital

``The severity of the unrealized valuation losses and decline in value of our investments were beyond our expectations,'' Sullivan said in a statement.

AIG has already started raising capital, offering $7.5 billion in stock, debt and equity units that obligate holders to buy shares, the company said. The insurer will issue another $5 billion in fixed-income securities later, Winans said.

The financial products business was co-founded in 1987 by Joseph Cassano, who stepped down as head of the unit after AIG reported a $5.29 billion loss in the fourth quarter.

AIG named Chief Financial Officer Steven Bensinger vice chairman overseeing financial services, which includes the unit Cassano used to head. The insurer is searching for a new CFO.

Bensinger's new position is ``extremely important given where we've had many of our recent challenges,'' Winans said.

Retirement Savings

Profit at AIG's U.S. commercial insurance unit fell 48 percent to $958 million on workers' compensation costs and expenses from tornadoes.

AIG, which gets about a third of its revenue from life insurance and retirement savings products outside the U.S., said profit in that division fell 4.1 percent to $1.46 billion on a decline in so-called partnership investments, which typically include private equity or hedge funds.

AIG's mortgage insurer, United Guaranty Corp., had a $352 million operating loss, compared with profit of $7 million a year earlier.

The insurer increased its quarterly dividend 10 percent to 22 cents a share.

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

Last Updated: May 9, 2008 07:51 EDT