Investors Turn Gaze to A.I.G.

Investors skittish about further losses in the financial industry have pounced on the American International Group, the beleaguered insurance company that has reported some of the biggest losses in the spreading credit crisis.

With Lehman Brothers running out of options this week, investors fear that A.I.G. will face billions in additional losses because it has effectively guaranteed complex financial instruments tied to home loans whose values have plummeted. If so, it too could need to raise capital, which Freddie Mac, Fannie Mae and Lehman have demonstrated can be a vexing problem in the current market environment.

CNBC.com

The company’s chief executive, Robert B. Willumstad, is expected to unveil a master plan Sept. 25 to turn the company around, but investors are increasingly impatient. Lehman also had promised to deliver a plan in a couple of weeks, but was forced to make an announcement this week in what proved to be an unsuccessful attempt to reassure investors.

A.I.G. stock lost nearly a fifth of its value Tuesday as investors watching the Lehman drama focused on others that might have to raise money. Since Mr. Willumstad took over in June, succeeding Martin J. Sullivan amid mounting losses, the stock has fallen nearly 50 percent.

Stocks rallied broadly at the end of trading on Thursday, with investors relieved that a deal for Lehman and perhaps even one for Washington Mutual, the troubled savings and loan, appeared to be in the works. A.I.G. shares gained 5 cents to close at $17.55.

Red ink has been flowing at A.I.G. It reported a loss of $5.3 billion for the second quarter, after a $7.8 billion loss in the previous quarter. The main problem is sophisticated contracts, called credit default swaps, that A.I.G.’s financial products unit sold to investors.

The contracts allow buyers to bet on the creditworthiness of debt obligations backed by mortgages. As home values have fallen, the values of those underlying mortgages have declined. A.I.G. has had to reduce the value of the swaps on its books.

Mr. Willumstad declined to comment on A.I.G.’s stock price Thursday, but a company spokesman, Nicholas J. Ashooh, said market pressure would not speed up the new business plan.

“In the meantime, there’s a lot of work going on to determine the best future course for A.I.G.,” Mr. Ashooh said. “The focus is on doing what’s right for the shareholders and the future of A.I.G.”

A sliver of good news came Thursday when A.I.G. announced a $115 million settlement of a lawsuit filed by shareholders on behalf of the company. A.I.G. is to receive $85 million in insurance payments covering its directors and officers, and $29.5 million from four former officers. The former officers were accused of breaching fiduciary duties by redirecting insurance business that generated hundreds of millions of dollars in commissions to another company they controlled.

Simultaneously, Maurice R. Greenberg, A.I.G.’s former chief executive and one of the former officers, began the first of what is expected to be three grueling days of depositions in a civil lawsuit brought against him by the office of the New York attorney general, Andrew M. Cuomo. The lawsuit accuses Mr. Greenberg of devising transactions to make A.I.G.’s financial condition look stronger.

A.I.G.’s board removed Mr. Greenberg in 2005, after regulators served A.I.G. with subpoenas. He was succeeded by Mr. Sullivan, a former co-chief operating officer of A.I.G., who oversaw the restatement of the company’s financial results covering a five-year period. But calm did not return; instead, the mortgage crisis ensnared the company.

Perhaps the most pressing concern for investors now is the exposure to falling home values. Although A.I.G. has sharply written down the value of its contracts, it has warned investors that more write-downs, into the billions of dollars, are possible.

To maintain its overall financial strength as its assets are falling in value, the company may have to raise new capital. Shareholders could find the value of their existing shares diluted if A.I.G. issued new shares.

This month, an analyst at Citigroup Global Markets, Joshua Shanker, issued a report saying that while new shares “could be extremely dilutive,” he did not think that selling stock would be the company’s only option for raising capital. A.I.G. could sell off certain operations, for instance, or shrink its insurance business in unprofitable markets.

A.I.G. outlined some of its risks in a securities filing with its second-quarter results. If one of the major credit rating agencies were to downgrade A.I.G.’s debt, the company could be forced to post additional collateral on contracts, the company said.

If just one agency downgrades A.I.G. debt by a notch, it could set off a collateral call of $10.5 billion, and if Moody’s and Standard & Poor’s downgraded the company together, A.I.G. could be required to post $13.3 billion.

A downgrade could also give counterparties on A.I.G.’s financial contracts the right to end the arrangements early, which the company has said could cost $4 billion to $5 billion. A.I.G. has said it does not expect all its counterparties to exercise this right.