AIG Shares Tumble On Capital Concerns

By Zachary A. Goldfarb
Washington Post Staff Writer
Saturday, September 13, 2008

Shares of American International Group, the nation's largest insurance company, plunged yesterday on fresh fears that it will have trouble remaining on firm financial footing as a result of the turmoil in the mortgage market.

AIG's shares fell $5.41, or 31 percent, to $12.14, the lowest point in 15 years and 83 percent below the 52-week high reached in October. The company joined a handful of other big U.S. financial institutions in suffering severe declines this week. Shares of mortgage giants Fannie Mae and Freddie Mac, taken over by the government last weekend, and investment bank Lehman Brothers lost most of their value this week.

The company made no specific announcement yesterday to precipitate a sell-off. But concern has been growing about whether it will have to sell subsidiaries to raise capital.

Problems at AIG threaten to further reduce confidence in the financial markets already shaken by crises at other financial firms.

After the market closed, Standard & Poor's warned that it might lower its ratings on AIG's debt. S&P ratings are used by investors around the world to judge the safety of certain kinds of debt. Lowering the rating would likely force AIG to pay more for loans and could force the company to come up with more collateral to back some of its complex insurance policies.

"We believe that AIG has sufficient capital and liquidity" to continue operations and fund insurance policies, S&P analyst Rodney Clark said in a statement. "However, additional market value losses will place some strain on the company's resources."

He added, "We now believe AIG's potential access to the capital market may be more restricted in the short term."

AIG spokesman Joseph Norton said the company is "working with a number of firms on a variety of options. We haven't announced the names of the firms or elaborated on the options."

AIG chief executive Robert Willumstad is scheduled to announce a three-month review of the company's strategy on Sept. 25. Earlier this year, AIG raised $7.5 billion in equity and $12.8 billion in debt. Some analysts expect Willumstad to announce a sale of some of the company's diverse subsidiaries, which offer a variety of insurance, from life insurance to workers compensation.

"AIG has numerous separate, legal entities that are insurance companies that are well capitalized in their own right and continue to operate just fine," said Gary Ransom, an analyst at Fox-Pitt Kelton.

The insurance causing AIG trouble, known as credit default swaps, covers losses on investments in certain kinds of securities. AIG made a big business of selling this insurance to cover losses in securities backed by mortgages.

As the mortgage market has melted down, AIG has been on the line to cover more of the losses, eating away at the firm's capital. Over the past nine months, AIG has posted $18.5 billion in losses.

Because of its many subsidiaries, several analysts said they don't believe AIG's financial condition warrants the dramatic stock drop of this week. But Gradient Analytics co-founder Donn Vickrey said AIG has repeatedly understated its exposure to the mortgage meltdown.

"When you see a big drop like that on one day and not much information is out there, you start wondering whether there's something pretty seriously wrong," he said.

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