AIG's Risk Premium


By Amey Stone Investors have long loved American International Group (AIG) for its strong management and remarkable track record of increased earnings. But lately the insurance giant finds itself caught in the crosscurrents of two major risks that are scaring the wits out of investors: fears of future terrorist attacks in the U.S. and the spread of Enronitis, or worries that accounting woes extend beyond the collapsed energy behemoth.

Reflecting those concerns, the stock of AIG, long considered a paragon of financial stability, has been bouncing around like a ping-pong ball. In February alone, the shares fell to $71, bounced up to $78, and then dropped back to $71 again.

"There are a few industry-specific dynamics as well as a couple of company-specific dealings that are making people a little gun-shy," says Erick Maronak, head of research at NewBridge Partners, which owns the stock. AIG is the kind of premier company investors should stick with despite all the current scrutiny, he says, pointing out that the recent spate of concerns shouldn't ultimately effect the company's market share or financial health. Nonetheless, first-time buyers may want to wait until this period of intense uncertainty dies down before venturing into AIG.

"UNDER THE SPOTLIGHT." No one knows better than the firm's legendary Chairman, M.R. "Hank" Greenberg, 76, that uncertainty isn't good for his company or stock price. "Everything is under the spotlight right now," he said on Feb. 25 at a meeting with reporters. Greenberg went on the offensive, discussing a range of concerns raised in the press recently -- from speculation that a case of the flu prevented him from attending an industry conference in Bermuda to the complex and controversial financial transactions that AIG structured for a bank that's under investigation by the Securities & Exchange Commission.

"There is a lot of uneasiness, and I would hope that we could get beyond that and get back to more normal conditions," Greenberg said. "Or I think the economy will suffer."

Greenberg used the meeting to plead his case that the Federal Aviation Administration (FAA) withdraw from the insurance market, which it entered following the terrorist attacks on September 11. "We don't want to compete with our government for business that the commercial sector can underwrite," he said. In September, the FAA started offering coverage against war and terrorism to airlines to fill the gap after private insurers withdrew from the market. But now the insurers, including AIG, are back, and Greenberg wants the U.S. government out. "After all, we're a taxpayer," he added.

That doesn't mean Greenberg is 100% opposed to government help. AIG says it would welcome some federal aid in the form of government-backed reinsurance to support insurers against massive claims stemming from future terrorist acts. AIG also says it's willing to pay for such coverage. While it's too early to predict how this will ultimately play out in Washington, Greenberg said the government may need to get involved since no private company offers it now.

"JUST READ IT." Clearly, further terrorism is a risk that's nearly impossible for an insurance company (which is in the business of putting a dollar figure on risks) to quantify. AIG is in great financial shape. In the third quarter, its losses due to claims following the September 11 attacks on the World Trade Center were $820 million, which didn't put a dent in its reserves -- now up to $26 billion. And, perversely, the attacks also created demand for property-casualty and life insurance policies, allowing the industry to raise prices and sparking a rally in insurance-company stocks.

Still, AIG is facing lots of questions from investors and analysts on other issues, including increased scrutiny of complex accounting brought on by Enron's downfall. Insurance is a complex business, and AIG, which writes many different kinds of personal and commercial policies in 130 countries and has other financial-services businesses, is about as complex as it gets.

AIG's financial statements, which include a $23 billion acquisition of American General Corp. in 2001, are lengthy and hard to decipher. Analysts have asked the company for more detailed reporting, which Greenberg says it'll start providing, along with holding quarterly conference calls starting with first-quarter results due out in mid-March. (AIG had kept such meetings to an annual basis, except when discussing a big deal.) "There is a lot of information about AIG if you take the time to read it," says Greenberg. "All you've got to do is just read it."

BACK TO BEADS. AIG is showing other symptoms of Enronitis, though, which Greenberg attempted to put to rest. The SEC is investigating the way PNC (PNC), a Pittsburgh-based bank-holding company, accounted for three AIG-structured finance transactions. AIG issued a statement on Jan. 30 saying it had properly accounted for its transactions with PNC. But a recent subpoena by the SEC to provide more information for its PNC investigation added to investors' fears of potential accounting issues.

Greenberg brushed aside the focus on complex financial transactions in his meeting with reporters. "There's a difference between complex transactions and dishonest transactions," he said. "If we're going to go back to simple transactions, we can start trading in beads."

Yet another recent concern Greenberg addressed that has attracted attention in the post-Enron collapse era is industry losses providing coverage to corporate board members, known as directors and officers insurance. Greenberg says rates for this kind of coverage will go up and that AIG had managed its risks and would not be among the worst hurt by more claims this year.

WHO'LL TAKE OVER? It'll take all of Greenberg's considerable skills and savvy to navigate AIG through these rough waters. And although he's a strong and vigorous leader, he's no youngster. Greenberg turns 77 in May and hasn't announced a successor. The company says a succession plan is in place but has so far refused to give details to analysts or investors.

That helps explain why rumors that Greenberg had the flu contributed to a $2.68 drop in the share price on Feb. 21 and 22, when he failed to show up at an industry event in Bermuda. The stock reached a low of $69 on the speculation but had recovered to $72 by mid-morning on Feb. 26.

NewBridge's Maronak says the stock will probably take a hit, at least temporarily, when Greenberg steps down -- which he hasn't given any indications he plans to do soon. Regardless, analysts are betting that AIG will emerge a winner from the challenging set of issues facing the industry and financial companies. Standard & Poor's analyst Catherine Seifert is keeping her accumulate rating but notes that her positive outlook has been "tempered by general market wariness about opaque accounting."

"OVERDONE." Merrill Lynch analyst Jay Cohen upped his rating on AIG to a strong buy on Feb. 8, after it reported pretax operating income of $2.9 billion, or 77 cents a share, on revenues of $16.7 billion for its 2001 fourth quarter. He says many of the company's core businesses were improving, and worries about its accounting were "overdone." Noting that the shares were trading at a smaller-than-usual premium to the market, he set a price target of $87 to $89.

For long-term investors, AIG is the kind of industry leader that usually pays to pick up when its shares are temporarily depressed. But given the issues facing the insurance industry after September 11 and increasing accounting concerns post-Enron, a wait-and-see approach might make more sense. Stone is an associate editor of BusinessWeek Online and covers the markets in our daily Street Wise column


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