Rivals Circle As Capital Constraints Pull AIG Stock Down >AIG
By Daniel at 12 September, 2008, 4:05 pm
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Rivals Circle As Capital Constraints Pull AIG Stock Down >AIG
Last Update: 9/12/2008 3:44:03 PM
By Lavonne Kuykendall
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)–As capital concerns continue to dog American International
Group (AIG) and drive down its share price, the odds increase that ratings
agencies and customers could begin to punish the company.
Shares of AIG, the largest commercial insurer in the U.S. by market share and one
of the largest in the world, were pounded this week, capping a nearly 80% drop
this year as worries grow over its potential mortgage-related losses.
And there’s apparently no end in sight to the declines, AIG’s stock down about
26% to $13 Friday after reaching a low of $12, its lowest price since April 1993.
The company offers other lines of insurance coverage and runs a variety of other
businesses, including asset management, aircraft leasing and financial services.
Lehman Brothers Inc.’s (LEH) difficulty this week in raising capital to cover its
own mortgage losses raises the specter that struggling AIG will have a hard time
too, and could need to dilute its stock drastically or sell assets at fire-sale
prices. AIG said in August that it is working on a strategic review of its
businesses and will give investors its conclusions on Sept. 25.
While AIG looks inward to try to fix its problems, competitors selling commercial
insurance, one of AIG’s dominant businesses, see an opportunity to poach clients
concerned about AIG’s prospects.
“We are hearing from brokers that customers are looking for options” as insurance
contracts come up for renewal, said Mario P. Vitale, deputy chief executive of
Zurich Financial Services’ global corporate unit in North America. “Even those
that hadn’t done it in a while.” He called it “inevitable” that some customers
will make a change within the next quarter or so, though it was difficult to
quantify numbers. Zurich is the second largest commercial insurer in the U.S.,
behind AIG. Both are among the largest global insurers.
An AIG spokesman did not return phone calls asking for a comment.
Contract renewals can be complicated and can take three to six months to
complete. Vitale said concern has increased over the last few months, and he
expects to see some account movement either in the fourth quarter or early next
year.
AIG’s status as a poster child for the mortgage mess is beginning to cross over
to the customer side of their business, and customers are beginning to ask
questions of their insurance brokers about weakness in the industry.
“They want to know if this is something they should be concerned about,” said
Robert Howe, a managing director at Marsh, the insurance brokerage unit of Marsh
& McLennan Cos. (MMC). “When things hit the media at the pace they are, it gets
to the C suite (CEOs, CFOs, etc.) and there are a lot of questions being asked.”
Howe said he isn’t seeing customers move their business because of subprime
losses at any particular insurer, though they are paying attention.
“It is a topic for discussion at every client strategy meeting we have,” said
Randy Nornes, executive vice president of Aon Global Americas, a unit of
insurance broker Aon Corp. (AOC). “We go through the industry outlook, what is
happening with some key insurers in terms of financial announcements. To the
extent they have choices of whom they will partner with, this is something they
will look at when you look at all insurers that are out there.”
At the most basic level, customers want to be sure their insurer has the money to
pay a claim, said Howe, which is more of an issue for so-called long-tail
coverage such as liability in a lawsuit, where claims can comes years after a
policy is written. Other customers have contractual requirements for a minimum
insurer credit rating, and want to be sure their insurer will continue to qualify
in the event of a downgrade.
One long-tail line where AIG dominates is in workers compensation, which made up
15% of its general insurance business premium volume in 2007. Wayne L. Salen, the
director of risk management for Labor Finders International Inc., which places
workers comp business with AIG, said in a recent interview that he is keeping a
close eye on AIG’s problems, particularly its credit rating. “You want financial
stability,” he said.
Moody’s Investors Service downgraded AIG’s credit rating to Aa3 in the second
quarter and could cut it again if losses mount, which could drive some insurance
customers to a new insurer. Moody’s said in August that it expects AIG to
“address potential liquidity and capital needs at various operating units,” or
else face another downgrade.
Salen said a downgrade could be an issue because of his own company’s contractual
obligations with clients. A downgrade could also affect pricing and service. “I
suspect there will be some activity,” in accounts moving to other insurers if
AIG’s situation deteriorates, Salen said.
But AIG’s options are limited: It needs to sell assets in order to raise capital.
The need for capital comes as losses from AIG’s huge portfolio of securities
backed by subprime mortgages appears likely to generate more losses in the third
quarter, while its mortgage insurance and lending businesses are also likely to
suffer.
On Thursday, it cost more to insure against a default by AIG through credit
default swaps than it costs to insure against a default by Lehman Brothers, which
is a fraction of AIG’s market value and the situation worsened Friday.
The distressed nature of AIG’s credit default swaps reflects investors’ view that
“AIG is pretty much shut out of the capital markets,” said Daniel Barrett,
analyst at Tradition Asiel Securities in New York. “They have to support their
capital losses with capital raises, and there’s no large institution that seems
willing to inject capital in the U.S. financial sector…It raises a lot more
questions than existed two weeks ago.”
Instead, AIG is seen as being forced to sell assets, and that concerns debt
holders who don’t know how that would affect their holdings.
As of 1 p.m. EDT Friday, AIG’s credit default swaps were quoted at between 11 to
14 points upfront, according to CMA DataVision in New York. If investors were to
enter into a CDS contract, they would have to pay roughly $1.25 million upfront
and $500,000 annually to protect a notional $10 million of AIG bonds against
default for five years. On Thursday, the annual cost was $668,000, according to
Markit.
Insurance customers generally pay more attention to an insurer’s underwriting
performance - or how well its premium revenue covers losses and expenses - than
its investment problems, Aon’s Nornes said.
AIG could itself decide to pull back on writing insurance in order to reduce its
need for capital and perhaps appease ratings agencies, said Citigroup analyst
Joshua Shanker in a Wednesday research note. “Given our opinion that 2008 and
2009 will likely evolve into industry underwriting losses, we would look
favorably upon AIG reducing its risk profile with the non-renewal of some P&Cbusiness,” Shanker said.
Nornes said, “To the extent (clients) have choices of who they will partner with,
this is something they will look at when you look at all insurers that are out
there.”
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