Investors in American International Group Inc., one of the world's largest insurance companies, have successfully weathered hurricanes, terrorist strikes and earthquakes, but an accounting probe is quite another matter.
AIG shares have plunged almost 30 per cent since investigations were launched in mid-February by New York Attorney-General Eliot Spitzer and the U.S. Securities and Exchange Commission, wiping out $55.4-billion (U.S.) in capital and forcing the resignation of financial legend Maurice (Hank) Greenberg as head of AIG. That decline is almost twice the current market cap of Manulife Financial Corp.
And some investors and analysts are beginning to wonder if the drop in the share price has simply gone too far for a company that has increased profit, revenue and shareholders' equity by more than 15 per cent a year for 30 years.
AIG shares fell to $49.91 on Mon, their lowest in two years, before closing Wednesday at $51.85 on the New York Stock Exchange, putting a value on the company of $135-billion. The shares were trading at $73.12 before AIG disclosed on Feb. 14 that it had received subpoenas relating to reinsurance transactions and non-traditional insurance products.
The worst-case scenario for the life insurance company and property/casualty insurer is that it could take a writedown of $8-billion, according to a report this week by Jay Gelb, an analyst at Lehman Brothers Holdings Inc. More likely, the charges will be in a range of $2-billion to $5-billion, he said.
AIG's unaudited shareholders' equity increased 16.9 per cent during 2004 to $83-billion ($31.47 a share). If Mr. Gelb's worst case came to pass, AIG's equity would only be reduced by 9.6 per cent.
The company also reported a 19.1-per-cent increase in profit in 2004 to $11-billion or $4.19 a share on revenue of $98.6-billion. The results include catastrophe losses from hurricanes, typhoons, earthquakes and tsunamis of $682.7-million. AIG shares “have limited downside below $50 a share and considerable upside potential as regulatory relief eventually permeates the shares,” said Michael Paisan, an analyst with Legg Mason Wood Walker Inc. He has a 12-month share price target of $65.
“The bottom line is that the shares of AIG have been beaten, battered and bruised over the past several weeks on the regulatory investigations,” Mr. Paisan said. The overwhelming majority of AIG's businesses are unaffected.
However, some analysts worry that the regulatory issues could take a long time to resolve, while others fear more skeletons might be found in the closet now that Mr. Greenberg has departed after running the company for almost four decades.
Part of the investigation focuses on a reinsurance transaction five years ago and other deals involving offshore subsidiaries, which are alleged to have been used to inflate AIG's capital. One of those entities, Starr International Co. Inc., a private company whose directors include Mr. Greenberg, owns 12 per cent of AIG.
The audited annual report is scheduled for release Friday after two previous delays.
On March 30, AIG estimated “that the maximum aggregate effect ... of known errors and changes in accounting estimates and classifications” would decrease the estimated shareholders' equity by 2 per cent or $1.7-billion.
However, news reports this week cited sources saying the writeoff is expected to climb at least another $1-billion or more above what AIG had originally forecast.
A deal done in 2000 with General Re Corp., a reinsurance company, has attracted a lot of publicity because General Re is a unit of Warren Buffett's Berkshire Hathaway Inc. AIG said the transaction was accounted for in an improper way, but the resulting restatement “will have virtually no impact on AIG's financial condition as of Dec. 31, 2004.”
However, reinsurance deals since 1991 with Barbados-based Union Excess Reinsurance Co. could reduce shareholders' equity by $1.1-billion, AIG said.
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