Mortgage craters, ropy disclosure, bloated costs, a newish boss desperately trying to stop the haemorrhaging amid calls for radical surgery, even a break-up. Citigroup? Aptly though this describes America’s biggest bank, it could just as easily apply to its biggest insurer, American International Group (AIG).
AIG’s place in the credit crunch’s hall of shame is now assured thanks to its record $7.8 billion loss in the latest quarter, bringing the red ink over the past six months to $13 billion. The main culprit is its book of credit-default swaps, much of it tied to subprime mortgages, which has been written down by $20 billion. A chastened AIG has joined the rush for fresh capital.
Disgruntled shareholders have a flag-waver in Hank Greenberg, who ran AIG imperiously for 37 years before being booted out in 2005 amid an accounting probe. Still the biggest individual shareholder, the 83-year-old lashed out at his former fief this week, averring that it had suffered a “complete loss of credibility”.
There is restiveness within, too. Executives at International Lease Finance Corporation, the world’s biggest buyer of commercial aircraft and part of AIG since 1990, are reportedly agitating for a spin-off. They worry that AIG’s woes will drag down ILFC: its credit rating was cut along with its parent’s following the latest loss.
Such huffing is a trifle disingenuous. ILFC has benefited from being under AIG’s wing, for instance amid the turmoil for aviation after September 11th 2001. And most of the dodgy default swaps were written on Mr Greenberg’s watch—indeed, AIG stopped selling them at the end of 2005, a few months after he had been replaced by Martin Sullivan, a former protégé.
But AIG has played its hand badly. It insisted until this year that it had $15 billion-20 billion of excess capital and that actual (as opposed to mark-to-market) losses were unlikely. It has since retreated from that position and modified its internal models (ie, made them less optimistic). But uncertainty still abounds. AIG estimates its ultimate derivatives losses will be up to $2.4 billion. Unnervingly, an independent assessor hired by AIG puts the potential cost as high as $11 billion. AIG thinks much of the current damage will be reversed, thanks to the vagaries of fair-value accounting. But why trust its judgment rather than the market’s? And any such gains won’t come at least until 2009, says Thomas Cholnoky of Goldman Sachs.
Softening insurance markets may compound AIG’s woes. With pricing power ebbing and catastrophe pay-outs set to rise after an unusually calm couple of years, America’s property and casualty industry—dominated by AIG and Berkshire Hathaway—seems to be entering another of its periodic downturns. Premium rates in casualty will fall by 10-15% this year, predicts Lockton, a broker.
With the bull run in stocks over, life insurance and annuities could suffer, too. And insurers face lower returns on investments in alternative assets, such as hedge funds and private equity. “Yellow lights are blinking all over the industry,” says Donald Light of Celent, a consultancy.
All of which means AIG faces a double whammy of credit-market missteps and a deteriorating core business. Time is not on the affable Mr Sullivan’s side. At the annual meeting this week, the directors reiterated their support for him, though some have privately begun to express doubts. Who said insurance was dull?