A bank analyst has lowered his second-quarter earnings estimate for American International Group based on credit market deterioration and expected accelerated recognition of credit default swap (CDS) losses by the company's new management.

Joshua Shanker with Citigroup, in a multicompany analysis released yesterday, revised his AIG estimate to 50 cents per share for the second quarter compared to a previous estimate of $2.18 per share. For the fiscal year, Mr. Shanker's estimate drops from $2.94 per share to $1.29 per share.

Mr. Shanker cited current credit market conditions as one reason for the revision. “After modest improvement in credit conditions in the first half of the quarter, credit spreads and credit indices deteriorated again in June,” the analysis states.

Additionally, Mr. Shanker said that he expects AIG's recent management change to result in an accelerated recognition of CDS losses “as part of a kitchen sink quarter….” The analysis says, “We believe management would aim to be aggressive about acknowledging potential losses.”

Due to these combined factors, the analysis estimates that AIG Financial Products (AIGFP) will incur a $2.5 billion loss in the second quarter, and so the second-quarter and fiscal-year earnings estimates were revised accordingly.

Poor market performance resulted in a lower revised second-quarter estimate for Berkshire Hathaway, according to the analysis.

“Although Berkshire has a balance sheet that is relatively clean in terms of subprime exposure, the company's long-term value-oriented investment strategy is still subject to short-term fluctuations in the stock market,” the analysis states.

The new second-quarter earnings per share (EPS) estimate for Berkshire is $2,272.01 compared to a previous estimate of $2,380.19.

The analysis notes that Berkshire focuses performance over the long term and should not be measured by the quarter.

Weather-related activity in the quarter, including tornadoes, resulted in lower earnings per share estimates for Allstate Corp. and The Hartford Financial Services Group Inc. Allstate's second-quarter EPS estimate was revised to $1.29 from $1.77, while The Hartford's EPS estimate was revised to $2.40 from $2.47.

RenaissanceRe Holdings Ltd., meanwhile, saw its EPS estimate revised upward in the analysis due to “benign reinsurance losses.” The analysis states, “While [the second quarter] saw an increased frequency of small-to-midsize losses, we believe that these losses will by and large affect primary insurers, not reinsurers such as RenRe, largely protected by excess of loss treaties and high attachment points.”

RenRe's second-quarter EPS estimate is now $2.05 compared to $1.89.

Special Reports /

Citigroup Analysis Lowers AIG Earnings Expectation

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