AIG shares sink as 2Q results augur further losses

Thu Aug 7, 2008 2:57 PM EDT

A few years from now, the world's largest insurer might not be so large.

Embattled American International Group Inc., in an effort to become profitable again, appears to be leaning toward shrinking — a similar strategy to that taken by Citigroup Inc., one of the world's biggest banks.

"A less complex AIG will be a better competitor," AIG's new chief executive, Robert Willumstad, said during a conference call Thursday with investors.

But Willumstad, a Citi veteran, has yet to reveal any definitive plans. And with the mortgage crisis still far from resolution, investors remain wary about stock in a company that has lost money for three straight quarters and that may have to raise more capital. After revealing a nearly $5.4 billion second-quarter loss late Wednesday, AIG saw its shares plummet 16 percent in Thursday's trading.

"AIG could not have reported more horrific results," wrote Bijan Moazami, an analyst with Friedman Billings Ramsey, in a note early Thursday. He downgraded AIG's stock to a "hold" rating from "buy."

"At this point, we believe that AIG is too big and too complicated for anyone to fully understand and it should be broken up," Moazami said. "We will reassess our views on AIG when a strategic plan is unveiled or when the market environment improves."

AIG operates a wide variety of businesses in about 130 countries, ranging from life insurance, auto insurance, property insurance, and mortgage insurance to retirement services, lending, investment services and airline leasing.

Wall Street's calls for a break-up of AIG are not as loud as they were for Citigroup, which was having problems boosting profits even before spiking mortgage defaults triggered the credit crisis last summer. Citigroup is not headed for a break-up now, but rather a paring down; its CEO said in May that in the next few years, the company — which also has suffered three consecutive quarterly losses — will shed about a fifth of its assets, including a huge chunk of its mortgage lending operations and investments.

Willumstad's review is still incomplete, but he said it will result in "significant changes."

"Our goal is straightforward: to define AIG's vision and determine the optimal portfolio of businesses based on where our true competitive advantages lie," the CEO said during Thursday's call. He reiterated, though, the company intends to keep International Lease Finance Corp., AIG's airline leasing business, which posted record results in the second quarter.

Over the past three quarters, AIG has lost about $25 billion in the value of credit default swaps — or default protection for bondholders — and about $15 billion in other investments. Executives say they believe actual, realized losses will end up being much smaller.

But the problem is that AIG — which called its subprime exposure "minimal" a year ago — is not only joining the likes of Citi and Merrill Lynch & Co. in its mortgage-related assets write-downs. Its other businesses are also weak.

"While these charges alone are disconcerting, some of the underlying trends in the company's core lines of business suggest that a return to more normal earnings power may be further off than we had previously thought," wrote Goldman Sachs analyst Thomas Cholnoky in a note to clients late Wednesday. "AIG is clearly facing competitive pressures in many of its business lines that are unlikely to abate in the near term."

AIG's general insurance segment saw a 54.3 percent decline in operating income to $1.39 billion. Income also fell in its life insurance and retirement services division and in its asset management unit. The company said it expects its residential mortgage insurance unit, United Guaranty Corp., to continue to see losses into 2009.

Keefe Bruyette & Woods analyst Cliff Gallant lowered his per-share earnings estimates for AIG to 40 cents from $1.60 for 2008, and to $5 from $5.45 for 2009. And Credit Suisse analysts lowered their price target on the stock to $30 from $45.

Shares of AIG fell $4.66, or 16 percent, to $24.43. They are still about $5 above the multi-year low they reached in July, but remain down about 59 percent since the start of the year.

"Investors may have been hoping that new CEO Bob Willumstad would have completed a comprehensive review of AIG's businesses and might be content to weather a one-time charge pursuant to that review," wrote Citigroup analyst Joshua Shanker in a note late Wednesday. But, he added, the notion of a large, conservative "kitchen sink" loss continues to weigh on investors.

AIG took a deficit of $5.36 billion, or $2.06 per share, in the second quarter. Before taxes, it lost $5.56 billion in what are called credit default swaps, and wrote down $6.08 billion in the value of its portfolio of mortgage-backed and other investments.

So far this year, AIG has raised $20 billion in capital through sales of stock, equity units and fixed-income securities.

"It's very hard to predict right now when and if we'll need more capital," Willumstad said. "Our current position we think is satisfactory. Future losses obviously can change that assumption, and we're obviously dependent on the condition of the U.S. housing market and how those will affect the securities that we hold."