AIG CEO Ready to ‘Take a Scalpel’ to Reshape Insurer

August 8, 2008

American International Group’s Chief Executive Robert Willumstad will soon take the scalpel to the world’s largest insurer — and not a minute too soon for investors blindsided by mortgage losses that led to an unexpected $5.36 billion quarterly loss.

Willumstad, who was AIG’s chairman before being named CEO on June 15, said he will unveil a plan to dramatically reshape the company at an investor meeting on Sept. 25, three weeks later than promised.

Willumstad, a 40-year banking veteran, intends to cut staff and divest parts of the sprawling company — but has kept mum on the details. “A less complex AIG will be a better competitor,” he said on a conference call with investors Thursday.

Analysts are convinced the company has become unwieldy. “We believe that AIG is simply too large and complex for anyone to fully understand, and that the company could eventually need to be broken into pieces,” said Bijan Moazami, an analyst with Friedman, Billings, Ramsey in Arlington, Virginia.

What will AIG shed? Willumstad will try to unload toxic mortgage-linked assets, and divisions where mortgages have drained profits, such as United Guaranty Corp, analysts said.

United, a mortgage insurer, posted a $440 million operating loss in the second quarter. “AIG waded into waters it did not fully understand. It is typically an insurer, but really spread out into different risky assets that have only now come home to roost,” said Byron MacLeod, an analyst with research firm Gradient Analytics. “Certainly we would expect the company to diverge itself of some assets, and focus on its core business.”

AIG has recorded nearly $25 billion in unrealized market losses from credit default swaps that guaranteed risky mortgage-backed debt.

For AIG, finding a way to get rid of the credit default swap portfolio would end the costly write-downs it has taken over the past three quarters. But it says it may lose the gains that could come once market conditions improve.

Others in the financial service sector, like Merrill Lynch & Co Inc, have unloaded distressed assets at fire-sale prices — 22 cents on the dollar in Merrill’s case.

On Thursday, Willumstad gave little hope the mortgage crisis was near an end. The Company more than tripled its “worst-case” estimate for credit swap losses to $8.5 billion from $2.4 billion in the prior quarter.

“We expect AIG to refocus efforts on its core insurance units,” said Standard & Poor’s analyst Catherine Seifert, in a research note. Willumstad said in June that AIG’s insurance business was its “core franchise and (its) core skill set.”

“The question is are they going to sell their winners and keep their losers?” said Gradient’s MacLeod. While that would boost coffers, it would hurt the balance sheet, he said.

To balance the hefty charges that would be connected to divesting liabilities, Willumstad may have to sell profitable businesses for much-needed capital. AIG has already raised in excess of $20 billion in capital, but ended the second quarter with less capital than at the end of the first quarter.

One survivor will likely be its highly profitable aircraft leasing unit, International Lease Finance Corp (ILFC), even though the leasing unit’s own management has said it may be better off on its own.

ILFC was one of the few bright spots in AIG’s second-quarter report, with operating profit soaring 85 percent to $352 million. Operating income at most of the insurance businesses dropped.

Willumstad told investors on Thursday he is in frequent contact with the former CEO, Maurice “Hank” Greenberg, and last spoke with him a few days ago. Greenberg, who remains AIG’s largest controlling shareholder, couldn’t be reached for comment — he’s in Beijing attending the Olympics. A spokesman said he is still in favor of cost-saving measures like aggressive job cuts.

The insurer added about 19,000 staff between 2005 and 2007, which it said was needed due to shortages in compliance and accounting. Greenberg, who left AIG in 2005 after regulators alleged accounting improprieties, said the increase was equivalent to adding “two army divisions.”

AIG has started to warn staff that cuts are coming, according to several people with knowledge of the situation who asked not to be named. “Morale is at an all-time low — everyone feels incredibly insecure,” said one employee.

(Editing by Jeffrey Benkoe)

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