AIG Needs More Money, Credible Management--Citi

Citi’s Joshua Shanker cuts his target for American International Group (AIG) from $47 to $41, citing an insufficient capital raise and a lack of confidence in management. Shanker thinks that the $20 billion of new capital raised in recent months is only sufficient for AIG’s financial products division and isn’t enough to cover the entire holding company and its subsidiaries:

Despite the new funds, it is not clear that AIG’s capital position is sufficient, as we believe it merely adds capital sufficiency for AIGFP without increasing former capital adequacy to the holding company. If AIG will need to funnel the funds to its subsidiaries, the rating agencies could suggest an
increase in capital cushion.

Shanker is also sceptical of CEO Martin Sullivan’s ability to lead AIG out of its hole given two recent senior level departures and investors’ lack of confidence in management:

Recent material losses and the need to raise capital have weakened investor confidence in a management that had ardently stated its confidence in AIG’s excess capital position, strong balance sheet and ability to avoid such losses. With two senior management departures, we believe that CEO Martin Sullivan will need to act quickly and decisively to manage AIG back to stability and profitability in order to regain investor confidence.

Finally, Shanker cites AIG’s weak balance sheet, a deteriorating macro environment, and softening fundamentals in its core business:

With an accumulated pre-tax MTM of $20 billion related to AIGFP’s CDS portfolio, $9.7 billion of realised capital losses, mostly OTTI, another $18.6 billion in unrealized losses, as well as material losses in UGC and a slowdown in AGF, AIG’s largest challenge is to manage its credit and mortgage
related assets and liabilities.

P&C underwriting results, excluding UGC, decreased by 45% year-over-year, even as favourable development accounted for 40% of underwriting profits. Softening markets, inflationary pressures and possible D&O losses will likely continue to pressure results. We expect lower partnership
income and increased competition to temper life insurance results. Target price drops $6, to $41.

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