AIG - More Mark to Market

American International Group (AIG) is the nation's largest insurer, and operates on a global scale. The company just reported a very large loss for the 1st quarter, 7.8 billion, and in addition to bearing the blame for the market's poor start this morning was rewarded with downgrades from S&P and Fitch. The company plans to raise 12.5 billion in order to fortify their balance sheet: as they explain it, to restore their capital cushion to around 20 billion which they consider optimal. The board voted to increase the dividend by 10%, explaining that they think the long term future is good. I listened to the conference call, while watching the stock trade down about 6% in morning trading.

AIG is heavily involved in Credit Default Swaps on RMBS and CDOs - bond insurance. They reduced their exposure to sub-prime backed RMBS starting in 2006 and have very little of the dread 2006 and 2007 vintages. The business is essentially in runoff. What amazed me was that the company has 20 billion in cumulative mark to market losses on this business but only expects to pay between 1.2 and 2.4 billion in actual losses.

So, they post 18 billion in losses they don't really expect to pay and then they plan to raise 12.5 billion of capital to fortify their balance sheet. Existing shareholders, of which I am not one, will have to bear some dilution to make this happen. Mark to market accounting (in this case) does not satisfy the primary objective of accounting, which is to accurately reflect the financial status of the company. Various analysts will have a field day speculating as to what the actual losses will be.

Get insight from Tom Armistead on where this stock has been and where it's headed here.

by The Freshman |  05/14/08  |  Stocks: AIG,