AIG Chief Sees ‘No Sacred Cows’ in Turnaround Plan

By | June 17, 2008

When former Citigroup executive Robert Willumstad lays out his turnaround plan for insurer American International Group in September, it will likely include plans to shed some of the sprawling group’s non-insurance entities.

Willumstad, who was tapped late on Sunday to take over the helm at the world’s largest insurer, has vowed to undertake a thorough review of its worldwide operations and indicated that he could shed people and units as part of his plan to turn around the company.

Willumstad is no stranger to the company, having been chairman for two years.

“We expect the company to de-lever its balance sheet through asset sales, with a focus on preserving and strengthening its core insurance franchise,” said Standard & Poor’s analyst Catherine Seifert, in a research note.

AIG Financial Products, a unit which took risky mortgage bets resulting in large losses, is the division most likely to be cut, said Bill Fitzpatrick, a financial stock analyst at Optique Capital in Racine, Wisconsin, which owns about 400,000 AIG shares.

“The P&C (property casualty insurance) business will probably remain intact, and the same thing for life insurance,” said Fitzpatrick.

Willumstad told investors on a Monday conference call that he sees AIG’s insurance business as its “core franchise and the core skill set” of the group, which may hearten those who have recently grown concerned that AIG’s insurance operations could be losing their edge.

AIG, which has been in the insurance business for 89 years, posted lower than expected operating earnings for the last quarter, rattling investors already spooked by large losses from risky subprime investments.

While Willumstad indicated his review could lead to asset sales, he did not specify where cuts could be made.

“Nothing is off the table, and there will be no sacred cows,” Willumstad said.

AIG operates in more than 130 countries around the world; and apart from insurance, its businesses include asset management, financial products and aircraft leasing.

International Lease Finance Corp, the aircraft arm, has said it might be better suited on its own, according to previous reports. Willumstad did not speak to ILFC’s fate. The unit has been one of AIG’s most profitable.

Mortgage Crisis

Willumstad — who will be under pressure to shore up investor confidence after the value of AIG’s shares has been halved over the past year — cautioned that while he plans to “really dig in,” there is no miraculous quick-fix for some of the wider economic issues that have proved a drag on AIG’s recent results.

“We must ensure our businesses are aligned with current and future market opportunities, that we have the right people in the right positions and that AIG is well positioned to deliver profitable growth for many years to come,” Willumstad said.

AIG chose Willumstad for the top job after investors grew disgruntled with Martin Sullivan, who took over more than three years ago as the insurer grappled with the fall-out from an accounting scandal that led to a $1.64 billion regulatory settlement.

While Sullivan initially won investor favor for his handling of those issues, some large investors more recently lost confidence in him after the company posted two quarters of record losses from bad mortgage bets — despite Sullivan’s earlier assurances that the problems were “manageable” and not likely to lead to material losses.

To date, AIG has written down a derivatives portfolio linked to subprime mortgages by more than $20 billion, but it expects to eventually record gains as markets for these risky assets improve.

Willumstad on Monday said it was premature to say whether any more liabilities would have to be recognized.

The write-downs, which were unrealized but which took a big bite out of the bottom line, led AIG to raise about $20 billion in fresh capital last month, saying it was doing so to bolster its balance sheet.

Willumstad said he felt “pretty good” about the capital boost but did not rule out further capital raising.

“We are in a different kind of era,” said Willumstad, stressing that while mortgage woes had dominated headlines for months, rising fuel prices, and problems in other sectors, such as airlines and the U.S. automobile industry, presented new economic challenges for corporations.

“Our intention is to keep the balance sheet as strong as possible,” he said.

Willumstad cautioned that it may take time, given market constraints, to immediately exit risky subprime mortgage investments.

“I don’t think that there’s any silver bullet here,” he said.

AIG shares were trading down 15 cents, or 0.4 percent, at $34.03 in early afternoon trade. The shares are more than 50 percent off their year-ago high of $72.91, last June.

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