Friday, August 08, 2008

AIG In Steep Decline

American International Group Inc., the biggest U.S. insurer by assets, fell the most since going public in 1969 after writing down more than $11 billion of holdings and saying it won't rule out raising capital.

``It's very hard to predict right now when and if we'll need more capital,'' Chief Executive Officer Robert Willumstad said today in a conference call with analysts. ``Future losses can change that assumption and we're obviously dependent on the condition of the U.S. housing market.''

Willumstad faces increasing pressure to turn around AIG after the insurer posted more than $18 billion in losses over the past three quarters. The second quarter's $5.36 billion loss, reported yesterday, was worse than analysts predicted and renewed concern that AIG may need to raise cash by selling shares. Willumstad called current capital ``satisfactory.''

AIG slid $5.25, or 18 percent, to $23.84 in New York Stock Exchange composite trading at 4 p.m., its biggest one-day drop in 39 years, according to Los Angeles-based Global Financial Data, which keeps records on historical share prices. The stock has plunged 59 percent this year. AIG's quarterly loss was driven by $5.56 billion in pretax writedowns tied to credit-default swaps.

Willumstad, 62, took over at New York-based AIG in June after investors including former CEO Maurice ``Hank'' Greenberg called for the ouster of Martin Sullivan. Willumstad, who said AIG made too many bets on the U.S. housing market, has promised to deliver a turnaround plan by late September.

New Questions

AIG held $112.2 billion in capital at June 30, the insurer said in a slide presentation, more than the $102.7 billion at the end of the first quarter. The company raised $20.3 billion in May by selling debt and equity.

The losses, tied mostly to the worst U.S. housing slump since the Great Depression, ``suggest that despite $20 billion of recently raised fresh capital, AIG's financial position and the company's ratings may be questionable,'' Bijan Moazami, analyst at Friedman Billings Ramsey Group Inc., said today in a research note cutting AIG to ``market perform'' from ``outperform.''

Credit-default swap contracts, which are guarantees AIG sold to protect fixed-income investors, caused record losses in the two previous periods and accounted for about $25 billion in writedowns over nine months.

The financial products unit responsible for the swaps guaranteed $441 billion of assets at the end of June including $57.8 billion in securities tied to subprime mortgages, compared with $469.5 billion and $60.6 billion on March 31.

Forecast Worsens

AIG tripled its forecast of possible payments on the swaps to $8.5 billion, according to a presentation on its Web site. The insurer said it hasn't made any payments on the contracts and has posted $16.5 billion of collateral as of July 31 demanded by investors who purchased protection through the swaps.

``When counterparties start requiring that you post collateral, the best-case scenario is you don't have use of the cash for quite some time,'' said Donn Vickrey, analyst at research firm Gradient Analytics Inc., who has the equivalent of a ``sell'' rating on AIG. ``In the worst-case scenario, this is probably a pretty good estimate'' of what the insurer will have to pay on the contracts.

Investors may demand $13.3 billion more in collateral if the insurer's credit rating is downgraded again, AIG said yesterday in the filing. Ratings reductions ``could have a material adverse effect on AIG's liquidity,'' the insurer said.

Most of the capital raised in May has been used as collateral by the financial products unit and not all of the assets have been allocated, Vice Chairman Steven Bensinger said today. ``There's a large sum of it left,'' he said.

`No Quick Fixes'

Standard & Poor's, Moody's Corp. and Fitch Ratings all downgraded AIG in May after the first-quarter loss. The firms give AIG their fourth-highest of 10 investment-grade scores.

AIG is unable to determine the effect ``that recent transactions involving sales of large portfolios of CDOs will have on collateral posting requirements,'' the filing said.

AIG marked down investments including fixed-income assets in the second quarter by $6.08 billion after ``severe, rapid'' drops in the value of securities backed by home loans. The company has units that originate, insure and invest in mortgages.

``There are no quick fixes,'' Willumstad said today. ``In uncertain times like these we will continue to make every effort to protect our capital, reduce risk and strengthen our balance sheet.''

Hedge Funds

Private equity and hedge fund profits fell to $91 million from $992 million. Hedge funds returned $207 million while private equity resulted in a $116 million loss.

AIG's mortgage insurer, which reimburses lenders when borrowers don't pay, may be unprofitable through the middle of next year, the company said. The insurer's American General Finance mortgage lender lost $40 million, compared with profit of $43 million a year earlier.

Allianz SE, Axa SA and Aegon NV, three of Europe's biggest insurers, reported lower profit as the subprime contagion and slumping stock markets ate into the value of their holdings.

Allianz, based in Munich, scrapped its earnings growth forecast after debt writedowns at its Dresdner Bank unit drove second-quarter profit down 29 percent. Paris-based Axa said first-half earnings tumbled 32 percent as falling stock markets curbed sales of savings plans. Aegon of the Netherlands posted a 58 percent decline in net income on investment losses.

Sullivan, 54, had replaced Greenberg, who ran AIG for almost four decades, in March 2005, two months before then-New York Attorney General Eliot Spitzer sued Greenberg and AIG for allegedly misleading investors.

Greenberg, 83, denies any wrongdoing in the case, which is still pending. Spitzer dropped portions of the lawsuit in 2006 that included four other allegations tied to the investigation. AIG agreed in 2006 to a $1.64 billion settlement of state and federal probes. Greenberg controls the biggest stake of AIG shares, according to Bloomberg data.

Source - Bloomberg


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