AIG May Disclose Its Strategic Review Before Sept. 25 Deadline

By Hugh Son and Shannon D. Harrington

Sept. 13 (Bloomberg) -- American International Group Inc., the largest U.S. insurer, may move up plans to raise capital or sell assets after the shares plunged 46 percent this week, said a person familiar with the company.

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 Friday on concern that the company may be the next big U.S. 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 share declines may crimp the insurer's access to capital. New York insurance regulator Eric Dinallo is keeping in ``closer touch'' with the company, said his spokesman David Neustadt.

``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 $5.41, or 31 percent, to $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.

Capital Seeking

The insurer hired JPMorgan Chase & Co. to raise capital, CNBC said, citing two people it didn't identify. A capital- raising plan may be disclosed today or Sept. 14 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 $20 billion selling assets including its consumer-finance, reinsurance and plane-leasing units, according to analysts at Citigroup Inc.

The insurer raised $20.3 billion in May by selling debt and equity, diluting the holdings of long-time investors. It's ``very hard to predict'' if AIG will need more capital, Willumstad said 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.

Collateral Damage

A ratings cut may have ``a material adverse effect on AIG's liquidity'' and trigger more than $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 $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 $25 billion in writedowns in three previous quarters on the swaps. The contracts backed $441 billion of assets as of June 30, including $57.8 billion in securities tied to subprime mortgages.

Writedowns

Most of the valuation declines on the swaps will reverse and AIG may have to pay $8.5 billion on the contracts in a worst-case scenario, the company said Aug. 7.

American General Finance, AIG's consumer lender, could fetch more than $6 billion if the unit sold for twice its book value. AIG Investments could sell for more than $3 billion if it sold for 2.5 percent of clients' assets under management. The stake in reinsurer Transatlantic Holdings Inc. is worth about $2.2 billion, based on Friday's share price.

Bank of America Corp. analyst Alain Karaoglan said Willumstad should reconsider the decision to keep its aircraft- leasing unit, which could sell for $7 billion to $14 billion.

Credit-default swap sellers demanded 12.5 percentage points upfront and 5 percentage points a year to protect AIG bonds from default for five years, according to broker Phoenix Partners Group. That means it would cost $1.25 million initially and $500,000 a year to protect $10 million in AIG bonds for five years. On Sept. 11, it cost $688,000 a year with no upfront payment, according to CMA Datavision.

Credit-Default Swaps

It now costs more to protect against an AIG default than it does to protect bonds of junk-rated casino operators MGM Mirage and Las Vegas Sands Corp. It costs $720,000 a year for protection on $10 million of MGM bonds and $675,000 for Sands.

Even before Friday, AIG's credit-default swaps traded as if the company was rated B1, four levels below investment grade on the Moody's Investors Service ratings scale and 10 levels under its actual rating of Aa3, according to data from Moody's capital markets research group.

To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Shannon D. Harrington in New York at sharrington6@bloomberg.net