AIG CEO, Analysts Clash Over Firm's Future Prospects

NU Online News Service

WASHINGTON--Analysts raised red flags about the future of American International Group at a congressional hearing, despite President Robert Benmosche's assurances that AIG is on a "clear path" to repaying the government and "remaking itself into a more streamlined and focused company."

"I see substantial progress," Benmosche testified at a hearing on AIG convened by the Congressional Oversight Panel, created to act as a watchdog over government investments made through the Troubled Asset Relief Program and other Treasury Department and Federal Reserve Board programs launched to prevent a financial meltdown in September 2008.

"We are redefining our strategy, restoring our financial strength, strengthening our key businesses, bolstering our corporate governance, instilling a focus on performance management, and making strategic hires to ensure that our remaining businesses thrive," he said.

He added that in recent months, AIG has become less reliant on government aid and has been able to instead tap the capital markets.

"We are working hard to complete the sale of AIA and Alico by the end of this year, to increase profits at our remaining businesses, and to improve operating returns," he said.

At that point, he noted, "we can begin to examine the alternatives we have to address the Treasury's TARP investment and equity holdings."

However, outside securities analysts also testifying at the hearing warned that AIG's creditworthiness and ability to reward its shareholders going forward remains in question, particularly because of concern that as the company stabilizes, the government will move to act on behalf of taxpayers, not shareholders, clouding its profit outlook.

Clifford Gallant, head of property and casualty research at Keefe, Bruyette and Woods in New York, testified that AIG "may eventually need to raise significant equity capital from public markets in order to fully stand alone."

He added that the shares of the stock are "grossly overvalued."

He cautioned that as the risk of systemic failure of the company fades, "we view there is a risk of a shift in government priorities to favor [taxpayer] interests."

He noted that, "Without a material transfer of value from the taxpayer to the shareholder, we believe the effects of full dilution, debt/preferred repayment and stock sales will leave little value left for the stub shareholder."

Gallant said AIG's debt levels are "enormous," observeing that "we see potential risks to several balance sheet items, including property and casualty reserves, the DAC asset, the value of its international leasing unit, and other concerns, including the remaining exposures and the carrying values of facilities managed by the Federal Reserve Bank of New York and outside managers."

Rodney Clark, managing director of ratings services for Standard & Poor's, added that while S&P's outlook for the "company's stand-alone credit profile is positive, we maintain our negative outlook on the company going forward."

This is based in part, he said, on S&P's belief that "AIG is particularly susceptible to the broad insurance market trends, given its somewhat weakened position, and that pressure on the operating performance of its subsidiaries may build, due to market factors such as aggressive pricing and competitive pressures."

Furthermore, he said, "the negative outlook reflects uncertainty with regard to legislative risk and its potential impact on the government's ability to continue to provide extraordinary support to AIG, if needed."

In his testimony, Benmosche talked about the sale of two international life insurance subsidiaries--AIA and Alico--for a total of about $51 billion, and its commitment to selling AIA to Prudential PLC.

He added that AIG's insurance businesses have remained healthy. He cited Chartis' first-quarter operating income of $879 million compared to $710 million in the first quarter of 2009--a 24 percent increase.

"Chartis has been taking important actions to further strengthen its risk management and position its business for the future," he said.

Benmosche also noted that SunAmerica Financial Group reported first quarter operating income of $1.1 billion compared to an operating loss of $160 million in the first quarter of 2009, as investment income increased and more distribution partners sold its products.

"The business has continued to stabilize and will continue to pay a key role in AIG's diversification of income," he said.

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