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AIG Loses Its Position as Industry Leader by Market Value

By | September 11, 2008

Fears that American International Group Inc.’s large mortgage exposure could trigger another round of losses has rankled investors so much that the insurer has lost its iron grip as the world’s industry leader by market value.

AIG’s shares have tumbled more than 70 percent over the past year. Including steep declines this week, AIG’s valuation has fallen to about $47 billion from roughly $175 billion a year ago, leaving it trailing such companies as AXA SA , with a market value of about $65 billion, according to Reuters data.

AIG started the week with a market value in excess of $60 billion.

The company, which sells insurance to 74 million customers from operations in more than 130 countries and territories, has been badly hit over the past three quarters by more than $25 billion in write-downs on credit default swaps (CDS) it wrote to guarantee mortgage-linked securities against default.

Compounding investor fears was the reminder this week that mortgage losses are still plaguing Wall Street, with Lehman Bros posting a record $4 billion loss, largely stemming from $5.6 billion in additional mortgage write-downs.

Lehman’s difficulty in extracting itself from its own mortgage woes has raised questions over whether AIG will be able to cast off the financial products unit that is home to its thorny CDS portfolio.

Lehman is now shopping for a buyer, after investors reacted poorly to a turnaround blueprint including plans to separate its toxic exposures into a separate entity.

“It doesn’t seem to have worked for Lehman,” said Ricardo Kleinbaum, an analyst at BNP Paribas in New York. “So I think the market’s look at it is, if Lehman didn’t get it, AIG won’t,” he added.

Lehman shares fell 41.79 percent to close at $4.22 on Thursday, and dropped further in after-market trading.

The cost to insure the debt of American International Group jumped 30 percent to a fresh record Thursday on concerns that the insurer would have to raise new capital but could find that a challenge.

Credit default swaps on AIG’s debt widened 150 basis points to a record 680 basis points on Thursday, or $680,000 per year for five years to insure $10 million in debt, according to Markit Intraday.

Investors are concerned that AIG’s credit rating could be cut, which would require the company to post up to $14.5 billion in new collateral against its credit derivatives, according to an Aug. 6 regulatory filing.

“In our view, AIG’s options are limited,” said Atlantic Equities analyst Alan Devlin, in a research note late Thursday, citing the deteriorating stock price, and a more than tripling in AIG credit spreads since May that signals weakening investor confidence.

Analysts, including Devlin and Citigroup’s Joshua Shanker, predict AIG will have to consider selling off units to raise fresh capital, including its profitable aircraft leasing arm.

Devlin said ILFC, the aircraft lessor, alone could fetch about $8.4 billion. In total, he predicts AIG will need to raise about $20 billion. Even after asset sales, it may still have to issue common equity to raise about $10 billion, Devlin added.

That may not sit well with investors whose holdings have already been diluted by AIG’s $20 billion capital raise in May, through the sale of equity and debt.

BRIGHT SPOTS

Chief Executive Robert Willumstad, at AIG’s helm since June, is crafting a blueprint to turn around the insurer founded in China 89 years ago.

But worries that another round of losses could precipitate ratings downgrades, and the need to post up to $14.5 billion in new collateral, leaves Willumstad, a former Citigroup executive under increasing pressure to hatch a fool-proof fix for AIG’s woes, which have already begun to erode its world-class franchise.

Still, there were a few bright spots for AIG on Thursday.

Investors may have breathed a small sigh relief that its exposure to Fannie Mae and Freddie Mac preferred shares is limited to between $550 million and $600 million, according to a source familiar with the investment.

While any more losses will be hard to swallow, some may have feared that a larger percentage of its total $3 billion preferred share portfolio was concentrated in the home-funding giants.

Fannie and Freddie shares have plunged amid the U.S. housing crisis, precipitating a U.S. government bailout of the companies last Sunday. That has left investors biting their nails over corporate holdings of U.S. agency equity, fearful that government intervention will wipe out value.

Also on Thursday, the settlement of a shareholder lawsuit, brought in 2002 by the Teachers Retirement System of Louisiana against former AIG executives, will benefit the insurer. AIG is to receive proceeds of the $115 million settlement, after fees are paid.

AIG shares fell as much as 21 percent early Thursday, but rebounded later to close up 5 cents, or a fraction of a percent, at $17.55 on the New York Stock Exchange.

(Additional reporting by Karen Brettell; editing by Richard Chang)

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