American International Group Inc, the largest US insurer, may move up plans to raise capital or sell assets after share prices plunged 46 percent this week, a person familiar with the company said.
Chief executive officer Robert Willumstad may announce the reorganization before his Sept. 25 deadline, said the person, who declined to be named because the New York-based insurer hasn’t made an official statement.
AIG shares slumped and the cost of insuring its debt rose to a record on Friday on concern that the company could be the next big US financial firm after Lehman Brothers Holdings Inc to run short of capital.
Standard & Poor’s said it may downgrade AIG’s credit ratings because the decline in share prices could crimp the insurer’s access to capital. New York insurance regulator Eric Dinallo is keeping in “closer touch” with the company, spokesman David Neustadt said.
“It’s a carbon-copy story for a lot of these guys that need capital,” said Robert Bolton, managing director for trading at Mendon Capital Advisors Corp in Rochester, New York. “It’s unprecedented that two storied franchises — Bear Stearns and Lehman — have taken on the type of water they have, and now there are fears about another titan, AIG.”
AIG dropped US$5.41, or 31 percent, to US$12.14 on Friday in New York Stock Exchange composite trading.
The price of credit-default swaps, used as hedges against losses on bad debt, approached distressed levels and traded higher than those for Lehman, the securities firm that’s fighting for survival.
The insurer hired JPMorgan Chase & Co. to raise capital, CNBC said, citing two people it didn’t identify.
A capital-raising plan could be disclosed before Monday and involve Blackstone Group LP or BlackRock Inc, the network said.
AIG spokesman Nicholas Ashooh declined to comment on the CNBC report, as did Joseph Evangelisti of JPMorgan, Bobbie Collins of BlackRock and John Ford of Blackstone.
AIG may be able to raise US$20 billion selling assets, including its consumer-finance, reinsurance and plane-leasing units, analysts at Citigroup Inc said.
The insurer raised US$20.3 billion in May by selling debt and equity, diluting the holdings of long-time investors.
It’s “very hard to predict” whether AIG will need more capital, Willumstad said on Aug. 7.
“As distressed as they are, raising new capital could be extremely hard,” said Tim Backshall, chief strategist at Credit Derivatives Research LLC in Walnut Creek, California.
A ratings cut may have “a material adverse effect on AIG’s liquidity” and trigger more than US$13 billion in collateral calls from investors who bought protection from AIG through credit-default swaps, the insurer said in an Aug. 6 filing.
The company was forced to put up US$16.5 billion in collateral through July 31.
“Our job is to assess the ability of the insurance company to pay their claims, and that’s not in question at this point,” said Neustadt, spokesman for Dinallo. “Given what’s going on with the holding company, we’re keeping in closer touch.”
S&P’s Rodney Clark said “AIG has sufficient capital and liquidity to meet its policy obligations and potential collateral requirements, which are significantly greater than the expected cash losses on the mortgage-related assets.”
Still, Clark said in a note, “additional market value losses will place some strain on the company’s resources.”
The firm reported about US$25 billion in writedowns in three previous quarters on the swaps. The contracts backed US$441 billion of assets as of June 30, including US$57.8 billion in securities tied to subprime mortgages.
Most of the valuation declines on the swaps will reverse and AIG may have to pay US$8.5 billion on the contracts in a worst-case scenario, the company said on Aug. 7.
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