AIG: From Blue Chip to Mediocrity

The quarterly report put out by American International Group (NYSE: AIG) on Thursday was horrendous, and is yet another example of our country’s financial institutions getting themselves into trouble by taking positions in financial instruments that they have no business being involved with.

The current credit market calamity is a strong reminder that banks and insurance companies need to be run like the conservative entities that they are. AIGs large level of pure speculation in credit default swaps runs contrary to the simple mission given to insurance companies, which is to help their policy holders manage their financial risk. Yet when an insurance company can’t manage their own house, as in the case of AIG, can they really be trusted to manage the risk of others?

The current management led by Martin Sullivan clearly has lost all creditability and I would imagine the clock is ticking from him and his team at AIG.

For the quarter, the company reported a net loss of $7.81 billion dollars, primarily related to unrealized losses in their credit default swap portfolio. However, even if you take these losses out the company still had a terrible quarter as nearly everyone of its business units were hit with significant declines in their operating income. These declines were primarily related to poor underwriting, high losses, a drop in investment income associated with lower interest rates and in some cases a drop in revenue and premiums.

Clearly, the company is facing much more significant issues then losses in its credit default swap portfolio as the company has lost direction under the stewardship of the current management team. Another possibility though is that the company has simply become too large and is therefore in need of a significant reorganization.

Below I have highlighted the operating results for the quarter of the majority of AIG’s divisions. It should be clear to you that the company is simply using losses in its credit default swap portfolio as cover for larger underlying issues:

- AIG Commercial Insurance saw its operating income decline 48.3% to $958 million. With premiums declining 14.9%

- The Personal Lines division saw operating income decline 93.3% to $7 million. Auto insurance premiums were flat while the private client group saw premiums rise 4.8%

- United Guaranty Corporation, AIG’s mortgage insurer, saw an operating loss of $352 million for the quarter.

- AIG’s Foreign Insurance division saw its operating income decline 6.4% to $818 million even though the U.S. dollar spent the majority of the quarter near record lows. Just think how bad this division’s numbers would have been had the dollar not declined!

- Domestic Retirement Services had operating income of $663 million, with no growth from the year ago period.

- AIG’s Foreign Life Insurance and Retirement Services showed operating income of $1.46 billion a decline of 4.1%. Again, just think about how important the low U.S. dollar was to this division.

- American General Finance showed operating income of $11 million down 78%.

- AIG Consumer Finance Group showed operating income of $11 million down 50%.

- The Asset Management division showed operating income of $154 million down 80%.

Of course, we cannot forget the Capital Markets division, which showed a loss of $8.85 billion for the quarter. Overall, the company had only two divisions that showed significant growth for the quarter. The Domestic Life Insurance division saw operating income rise 17.8% while the Aircraft Leasing division saw operating income climb 40.9%.

It was without a doubt a terrible quarter for AIG and one that will likely force management to reexamine the way they run their business. This much is clear though: they should no longer be regarded as the blue chip they once were as management and the company clearly have significant issues that they must examine and address.

In my opinion, when the integrity of an insurance company or a bank for that matter is questioned the company as a whole cannot be valued above book value. As such, I do not find American International group attractive at any level above $30 dollars a share, and even then I wouldn’t touch the stock until after the next report as it is entirely possible that the core business may continue to deteriorate along with the companies credit default swap portfolio.

While it may not yet be time to bring back Hank Greenberg, it is clearly time for the board to take a proactive look at managments failings and the possibility of spinning off some of its subsidaries in an effort to simply the AIG story and return it to its past glory.

For Further Review:

AIG Quarterly Press Release

Disclosure: None

Comments

[WAKEUP]

"...bring back Hank Greenberg..." GREENBERG ? ? ! ! Are you guys INSANE ? That guy will suck what little life there is left in Awful Insurance Gnat as soon as he gets there. This is the guy who routinely violated laws, as well as company policies. Please.

[orca]

Yeah, bring back uncle Hank and get yourself a second a**hole drilled in the process! This guy should be on Guantanamo, not hiding behind some opaque shell somewhere in the Caribbean, playing the Godfather (as in Marlon Brando) to higher management. The problem with AIG is that whichever way you spin it this company is not to be trusted, so don't invest in it.

[helplessobserver]

AIG's stock chart looks a lot like ABK's as its bad news dribbled out.