AIG Chief Faces the Music
For Marty Sullivan, CEO of
American International Group
(AIG) - Get Report
, the honeymoon ended in February.
Now, a divorce could be in the offing.
Sullivan got a break from AIG shareholders after he replaced the legendary Maurice "Hank" Greenberg at the helm of the global financial giant amid scandal in 2005. But the magnitude of the company's losses and the clear missteps it made last year put Sullivan's future at AIG in doubt.
In the latest move that is befuddling shareholders, AIG announced it
will raise $12.5 billion in fresh capital
to shore up its balance sheet amid massive writedowns on its investment portfolio, diluting its existing shares with new equity offerings. At the same time, the company is raising its dividend by 10% to 22 cents a share -- half its planned amount -- in a move that will cost an additional $202 million on an annualized basis.
The dividend increase amounts to small change for shareholders, but many investors were questioning why the company would pay a dividend at all at a time when its raising capital to the tune of 10% of its market cap.
"This is totally irrational from an investor's standpoint, but for Sullivan, it seems to make sense because he's trying to mollify some very irritated shareholders, many of whom have held the stock for a very long time," says Sean Egan, president of Egan-Jones Ratings, an independent ratings agency. "If Sullivan were coming from a position of strength, he would be able to level more with shareholders about the company's situation, but he's still trying prove himself."
Sullivan responded to questions about the dividend raise on a conference call with analysts on Friday morning.
"The dividend increase is a reflection of the board's and management's long-term view of the strength of the company's business, earnings, and capital generating power," said Sullivan. "The capital raised is a response to the events of the last two quarters and its effect on our capital position. It will fortify the balance sheet you expect us to maintain and provide us with increased financial flexibility in these turbulent times. It will also position us well for the future. The two are simply reflexes of a positive long-term view and a prudent response to the current environment."
Sullivan faces renewed scrutiny after Wall Street's credit crisis has already led to the ouster of corporate chieftains at the helm of companies like
Citigroup
(C) - Get Report
,
Merrill Lynch
( MER),
MBIA
(MBI) - Get Report
and
Bear Stearns
( BSC).
AIG spokesman Chris Winans said that Sullivan has proven himself capable of shepherding the company through a crisis and a high degree of confidence in him remains.
"Any discussions about the future of his job are very speculative," WInans said. "If there's an ultimatum out there, it's certainly something that we're not aware of."
AIG's stock is now down 40% from where it stood at the end of 2005. Shares closed down $3.87, or 8.8%, to $40.28 Friday, after the company reported disastrous results for its first quarter on late Thursday. The company wrote down $9.1 billion of its credit derivatives portfolio and lost an additional $6.1 billion in its investment portfolio.
The insurer reported an overall loss for the period of $7.81 billion, or $3.09 a share, compared with earnings of $4.13 billion, or $1.58 a share, during the year-ago period. AIG's results caught Wall Street off guard again. Analysts, on average, had expected a loss of 76 cents a share, according to consensus estimates reported by Thomson Reuters. In the lead-up to the report on Thursday, Standard & Poor's analyst Catherine Seifert slashed her earnings estimate for the Dow component to an operating loss of $1.10 a share, down from her previous estimate for earnings of $1.22 a share.
The losses sent major stock indices tumbling on Friday as investors contemplated more rounds of heavy losses for the financial sector amid the downturn in the U.S. housing market and its fallout in the credit markets. AIG's predicament also raised the specter of financial pain
spreading into the insurance industry
, where mortgage-related losses have so far been relegated to monoline insurers like MBIA and
Ambac
( ABK) and reinsurance giants like
Swiss Re
.
AIG's performance stands out, however, because the company assured investors in December that it had "little to no exposure" to asset-backed commercial paper, structured investment vehicles or collateralized debt obligations tied to residential mortgage-backed securities. It later disclosed in a regulatory filing that its auditor, PricewaterhouseCoopers, concluded it had "a material weakness in its internal control" related to its accounting for derivative securities.
In mid-February, AIG reported a fourth-quarter loss of $5.3 billion, thanks in part to a pretax charge of $11.12 billion on its super senior secured credit default swap portfolio. Despite early warnings, the charge surprised Wall Street and sent shares of AIG tumbling while Sullivan declared that the company was in "uncharted waters." Joe Cassano, the head of AIG Financial Products, announced he would retire at the end of March.
In yet another sign of how AIG's risk management team was blindsided by its mortgage-related losses, the company announced in March 2007 that it would take on more leverage to ramp up its share repurchases. From then until mid-February of this year, AIG bought back about $6 billion worth of its shares, and now it has suspended the buyback and it's raising all that and far more in new equity offerings.
On Thursday, Sullivan conceded in a statement that the company misjudged market conditions.
"The severity of the unrealized valuation losses and decline in value of our investments were beyond our expectations," he wrote, adding that the first-quarter results "do not reflect the underlying strengths and potential of AIG."
Winans adds that "there was a pretty dramatic change in market conditions and clearly the environment in which we launched the share buyback program was dramatically different than the environment we're in now."
Meanwhile, the company reported that its insurance business is also struggling. In the first quarter, AIG paid out a greater amount on losses and expenses in its property and casualty operations than it brought in with premiums. Its combined ratio rose to 96.9% in the period, up from 87.5% last year.
The results led ratings agency Standard & Poor's to downgrade AIG's credit rating, suggesting that raising dividend payments to shareholders may wind up costing them more in borrowing costs in the future. Fitch Ratings also knocked down AIG's credit rating.