The largest insurance firm in the world posted a net loss of $5.29 billion, amounting to $2.08 per share for the final quarter of its fiscal year.
This loss was largely due to the $11.1 billion writedown that AIG made on derivatives which were partly related to the sub-prime mortgage market.
As a result of the poor performance, Joseph Cassano, the executive who oversaw the derivatives operation has agreed to step down after more than two decades at AIG.
As the news broke, shares fell by $3.29, which is 6.6 per cent, to $46.86, according to Bloomberg.
"The magnitude of these losses is clearly troubling, especially as we have continued to see further deterioration in market conditions beyond the end of the year,'' Nigel Dally, analyst at Morgan Stanley with an 'overweight' rating on AIG, said.
But the bad news is not over for AIG, which warned investors to expect more writedowns this year.
AIG admitted that the results for 2007 were "clearly unsatisfactory''.