American International Group , the world’s largest insurer, is expected to report a quarterly loss Thursday, with crippled mortgage investments taking a $5 billion bite out of its derivatives portfolio.
Analysts’ average forecast is a loss of 18 cents a share, according to Reuters Estimates.
A quarterly loss — which would be only the second since the 1970s for AIG — would follow the insurer’s disclosure this month that auditors had found a “material weakness” in the way it accounted for some financial instruments tied to mortgages.
AIG earned a rebuke from its auditors after it told them it would slash the value of a credit default swap portfolio by $4.88 billion through November. The insurer had previously included a spread differential in calculating the portfolio, which valued the securities more favorably.
The move rattled investor confidence in Chief Executive Martin Sullivan, who was brought in about three years ago after an accounting scandal unseated CEO Maurice “Hank” Greenberg, who had steered the insurer for nearly four decades.
AIG shares have dropped 26 percent in the past 12 months, underperforming the KBW Insurance index, which is down 16 percent over the same period.
The slump has provoked some unfavorable comparisons with AIG’s stock performance under Greenberg, who has been in a protracted legal fight with AIG since his ouster.
“There are plenty of people who remember the golden (Greenberg) years,” said Ron Shelp, a former AIG executive who reported directly to Greenberg and later wrote a book on him titled “Fallen Giant.”
“Whether you liked him (Greenberg) or not, the shares went up and up and up. It was an incredible performance,” Shelp said.
AIG shares are now trading at roughly half the price they fetched in late 2000 when the shares topped $100 apiece. The stock is now basically unchanged from where it stood when Greenberg left under the cloud of an accounting scandal.
AIG restated $3.9 billion in earnings from 2000 to 2004, leading to a $1.6 billion regulatory settlement in 2006.
On Monday, a jury in Hartford, Connecticut, found four former executives of Berkshire Hathaway Inc’s General Re and a former AIG official guilty on criminal charges related to a reinsurance contract used to inflate AIG’s loss reserves in 2000 and 2001, something prosecutors said painted an artificially bright picture of its financial position, thereby propping up the share price.
Prior to AIG’s Feb. 11 accounting warning, Wall Street’s average profit forecast for the fourth quarter was 98 cents a share. Analysts have taken differing views on the size of the hit AIG will take in the fourth quarter.
The outlook of 10 analysts surveyed by Reuters is broad, ranging from a profit of 24 cents a share to a loss of $1.20.
Goldman Sachs analyst Tom Cholnoky, the most bearish of the 10, estimated in a Feb. 12 note that AIG results could be marred by a $10 billion non-cash write-down of its derivatives portfolio — $5 billion already disclosed and another $5 billion for December.
In the third quarter, AIG’s profit fell, and missed expectations, after it recorded a $352 million hit to the value of its credit default swaps. The insurer beat Wall Street’s average forecasts in the three previous quarters.
The fourth-quarter results are due after the market close on Thursday.
Greenberg, who has been critical of AIG’s management in recent months, retreated earlier this year from plans to become an activist investor against his former company, after New York state insurance regulators barred him from doing so.
Shelp said that if Greenberg, who controls roughly 12 percent of AIG’s stock, had been given a green light to proceed, some investors, bitter about the slump in AIG shares, would have been willing to support him.
However, not all see AIG’s stock performance as the measure by which to grade management.
“Our opinion of Martin Sullivan has been favorable,” said Matt Nellans, a Morningstar analyst. “To me, this is drama that has nothing to do with anything; we focus on the value of the company.”
Nellans has a fair value target of $83 per share on AIG.
Note: AIG President and Chief Executive Officer Martin J. Sullivan will host a conference call, broadcast live over the Internet, on Friday, Feb. 29, 2008, at 8:30 a.m. EST to discuss AIG’s fourth quarter results.
(Editing by John Wallace and Braden Reddall)
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