"Is It Safe?" is a feature by TheStreet.com Ratings that looks at a company's risk-and-reward potential. Find out if your stocks are safe Tuesday and Thursday mornings at 4.
Like a car crash,
American International Group
has drawn onlookers, both professional and amateur, ever since its stock collapsed last year. No wonder -- its shares are almost twice as volatile as the broader stock market.
Since then, the stock has fallen further as the insurer revealed it had insufficient capital to cope with claims. The government has rushed in to provide aid, time and again, saying AIG is "too big to fail." The company, no longer the largest U.S. insurer, posted a loss of $99.3 billion last year. There was a collective sigh of relief when it lost "only" $4.4 billion in the first quarter of 2009.
AIG has been unable to sell its aircraft-leasing business and is reportedly considering how it could retain ownership. In another proposed sale, the asset-management division has lost the interest of
, according to the
Wall Street Journal
, suggesting any deal may progress with other partners. Clearly nothing is going smoothly for AIG.
Two weeks ago, AIG made the call to complete a reverse split of its stock, offering one share for every 20 held. Short sellers, betting on a price decline, saw an opportunity to move into the stock. AIG is now down 56% in the past month. Over 12 months, the company's shares have plummeted 97%.
analyst suggested last week there is a possibility that there is no equity left in AIG. The stock is essentially worthless, he reckoned. AIG, unfortunately, followed up that news with the announcement that it's seeking to pay $235 million in contractually obligated bonuses.
According to SNL Financial, the volume of trading in AIG's stock checked in at 733% of regular trading last week, suggesting short sellers had been closing out their positions. Shares of the old
had been acting similarly.
AIG is a volatile stock. Its beta of 1.73 may not be the highest --
is 2.23 and
is 2.30 -- but the swing in its stock price, down 28% last Thursday followed by two days with gains of 24%, is unique.
AIG's stock doesn't usually move on the basis of anything fundamental. It's now at its most dangerous, prior to second-quarter results, with speculation that it might book enormous losses again. Amended financial statements filed for 2008 indicate that the $193 billion value of its credit default swaps may lead to more losses if credit markets continue to deteriorate.
Short sellers saw this weakness and pounced. But a stock squeeze led to the price rising just as dramatically. No individual investor should buy AIG at the moment, unless day trading while wearing Teflon pants. Analysts' consensus share-price estimate is a questionable $108.50. The stock is trading 87% lower, suggesting short sellers may still be on the prowl.
is believed to be interested, for about the fourth time, in some of AIG's assets. MetLife will explore its options slowly and negotiate even more slowly if it really is interested. If AIG is forced to take more losses and taxpayer funding, the company may have to be broken up and sold or given away to anyone prepared to take on the liabilities.
Maybe a bankruptcy filing a la GM wouldn't be such a bad option, as long as the "bad" AIG is liquidated with some form of guaranteed support, minimizing the potential impact on creditors. The new AIG would be wholly owned by taxpayers, and in that case ought to be broken up and sold, with the proceeds repaid to the Treasury. Those actions would preserve policyholders' rights and remove considerable uncertainty that surrounds AIG.
TheStreet.com Ratings gives AIG a "sell" recommendation.
TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.
Gavin Magor joined TheStreet.com Ratings in 2008, and is the senior analyst responsible for assigning financial strength ratings to health insurers and supporting other health care-related consumer products, including Medicare supplement insurance, long-term care insurance and elder care information. He conducts industry analysis in these areas. He has more than 20 years' international experience in credit risk management, commercial lending and analysis, working in the U.K., Sweden, Mexico, Brazil and the U.S. He holds a master's degree in business administration from The Open University in the U.K.