Tuesday, December 22, 2009

AIG: Still Not Out Of The Woods

. Tuesday, December 22, 2009

By stockOzone team

The $182 billion “rescue” of what was once the world’s largest insurer still ranks as the worst moment in the history of financial markets.

The company reversed a six-quarter losing streak by posting profits in the two latest quarters, which led many investors to believe that the insurer has finally made a comeback. Investors were also encouraged by CEO Robert Benmosche's remark that said that he was confident about AIG's ability to repay the Treasury and the Federal Reserve. However, even with the profit, AIG’s still a sick company. Cleaning up the mess at AIG (NYSE: AIG), which is 79 percent owned by the government, is a difficult task. The insurer is selling all sorts of assets to raise cash- including the crown jewels. In the meantime, many AIG clients have migrated to other insurers. So building a book of new clients and returning to profitability with the AIG name may very well take a couple of generations. Even the federal government has acknowledged that the company might have difficulty repaying all the money it owed taxpayer

Recently AIG said that it has eliminated $25 billion of its debt with the New York Federal Reserve by exchanging it for preferred shares in two of its business units. However, there is hardly any reason to celebrate. This action doesn't really result in the NY Fed getting its money. It just exchanged one asset for another, but preferred shares aren't cash. Indeed, the New York Fed went from being less of a creditor to being more of a shareholder. Taxpayers still have that $25 billion exposure to AIG, just in a different form. The move will leave AIG with a massive charge of $5.7 billion, virtually wiping out any profit the insurer might sustain in the fourth quarter, and further complicating its already obtuse earnings report and balance sheet.

Meanwhile, its major business units, life and property casualty insurance, are both bleeding revenue. American International Group Inc. suffered an 87 percent quarterly sales decline at its European life business as U.K. clients abandoned the firm, draining value from operations the insurer is selling to repay a U.S. bailout. AIG's global property-casualty division, which sells policies including coverage of property, airplanes and corporate boards, had a 13 percent drop in third- quarter premiums, to about $8.1 billion.

AIG's problems are not just related to asset fire sale. Unlike Citigroup which is on its way to be divided into good bank and bad bank, AIG can't be divided into good insurer and bad insurer, for two reasons. First, AIG is trying to selloff whatever ‘good' is left in it. Second, just as few rotten apples can spoil the entire basket; bad assets in AIG are leading to devaluation of even good assets. American International Group Inc.’s plane-leasing unit was slashed to junk by Moody’s Investors Service on prospects the bailed-out insurer may cut off funding for the business next year.

It appears that things are not going well at the firm’s flagship insurance business, renamed Chartis .Sanford Bernstein analyst Todd Bault, who recently cut AIG’s price target to $12 from $20, said in a research note that he was surprised by the AIG results, adding “it appears at a minimum that AIG’s results are worse than its other large peers and directionally worse than its booked reserves.” Similarly, S&P equity analyst Cathy Seifert noted that as of Sept. 30, the tangible common equity per share was a negative $162.06. That means, in theory, after subtracting all the liabilities on the balance sheet from the assets — excluding goodwill and other intangibles — shareholders would still be in the red to the tune of more than $162 a share.

Already, U.S. limits on compensation has hurt the insurer’s ability to retain talented staff. It has been aggressively cutting prices in order to gain business for short-term liquidity reasons. AIG CEO says firm needs two years to repay aid. Serious investors should stay away from AIG as there is little hope that it will be able to repay taxpayer's money in near future.

Disclosure: Author doesn’t own any of the stocks discussed here.

Disclosure: Author does not own any of the stocks discussed here.

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