By Erik Holm and Hugh Son
July 9 (Bloomberg) -- American International Group Inc., the insurer bailed out four times by the government, fell the most in nine months after Citigroup Inc. said the firm may have no value left for shareholders after repaying the U.S.
AIG plunged $3.62, or 28 percent, to $9.48 at 4:15 p.m. in New York Stock Exchange composite trading, the biggest drop since September 2008. The insurer has lost more than half its value after implementing a 1-for-20 reverse stock split when trading closed June 30.
“Our valuation includes a 70 percent chance that the equity at AIG is zero,” said Joshua Shanker, an analyst at Citigroup, in a note to investors late yesterday cutting his price target on the New York-based insurer by more than half.
Departing Chief Executive Officer Edward Liddy is under pressure from lawmakers to sell assets to help repay the $182.5 billion rescue package that was required to prop up the insurer after losses on credit-default swaps tied to U.S. home loans. The company said last week that other derivatives, backing about $193 billion in assets for European banks, could have a “material adverse effect” on AIG’s results.
“The company has not been forthcoming about the sequence of events that would result in a loss” on the European contracts, Shanker said. “Even a proportionally small loss could be significant.”
Liddy said last month at the firm’s annual meeting that the insurer has an “excellent chance” of repaying the government. Liddy’s remarks echo comments he made to Congress in May when he said the company can pay back a government credit line and $40 billion stock investment within five years. The insurer may need more time if markets worsen, he said then. Christina Pretto, a spokeswoman for AIG, declined to comment.
Liddy has announced deals to raise about $6.7 billion in asset sales since the first rescue in September and said he may hold public offerings for stakes in AIG units after the company struggled to sell the businesses in their entirety. Liddy, appointed to run the company after AIG agreed to turn over a stake of almost 80 percent to the U.S., said in May he plans to step down once a successor is found.
“The CEO’s motivation and ability to lead may be compromised by his preparations to transition the company’s top seat to another,” Shanker said.
AIG’s board approved the reverse split after the company plunged more than 95 percent in the past two years, saying that a higher price may attract institutional investors who don’t typically buy shares trading for less than $5.
Investors are betting against the stock in “anticipation of future financial woes,” Shanker said, lowering his price target to $14 from $36. He said the company has a 20 percent chance of continuing to operate as a scaled-back commercial insurer, a 5 percent chance of restructuring its government agreement again, and a 5 percent chance of restructuring its capital position using divestitures.
Shareholders may have no value left if AIG is forced to sell its assets and can’t command prices that exceed the insurer’s liabilities, a scenario that has a 60 percent chance of occurring, according to Shanker. He said there is also a 10 percent chance of insolvency, which may also wipe out investors.
“We remain skeptical regarding AIG’s ability to pay off its debt in full, particularly as it loses cash flows of sold off or spun off operations,” Shanker said. The company has sold a business covering cars in the U.S., Canadian life operations, an equipment guarantor and its majority stake in reinsurer Transatlantic Holdings Inc.
The government’s rescue includes a $60 billion credit line, $52.5 billion to buy mortgage-linked assets owned or insured by the company, and an investment of as much as $70 billion. AIG plans to reduce its debt under the credit line by $25 billion by handing over stakes in two non-U.S. life insurance units, the insurer said last month. AIG has tapped about $40 billion from the line.
The insurer isn’t likely to repay the full amount it owes senior unsecured bondholders, according to a Barclays Capital report. Senior unsecured bondholders hold $59.2 billion of AIG debt, analysts led by Maneesh Deshpande said in a note to investors. The insurer will have to repay borrowings on its credit line with the Federal Reserve before paying back its bonds.
AIG was cut to “sell” by Standard & Poor’s equity analyst Catherine Seifert yesterday on the prospect that more investors will bet against the stock. The split “may ease the mechanics of shorting AIG shares,” Seifert said. She previously rated the shares “hold.”
Short selling is when hedge funds and other investors borrow shares and then sell them betting their price will fall. If it does, they buy the shares back at the cheaper price, return them to the lender of the shares and keep the difference.