Are the Losses at AIG Accelerating?

American International Group’s (NYSE: AIG) announcement on Tuesday that it would undertake an additional capital raise highlights the precarious nature that the company currently finds itself in.  The $20 billion dollar capital raise shows management to be incapable of running the company.  In raising more capital so soon after the last capital raise management has managed to lose all credibility with the market.  It is truly sad to see such an iconic American company fall so far from grace.  I have written previously about its fall to mediocrity, that article can be found here.

In raising $20 billion dollars within the last quarter, $7 billion coming with the most recent announcement, management has allowed the market to raise significant questions about Martin Sullivan’s ability to run the company.  The increased level of capital raised can be the result of two things in my opinion.  Either the losses in their credit default swap portfolio have expanded or the core insurance business is deteriorating.  I tend to think that the losses are accelerating, particularly if they tried to hedge their exposure after the most recent quarterly report.

The core business itself may also be deteriorating as last quarters numbers, as discussed in my previous post on AIG, were not good.  It is highly likely in my opinion that management has been so distracted with the losses in their credit portfolio that they have failed to adequately run the insurance business.  David Merkel’s article on breaking up AIG, which can be found here, is the right thing to do in my opinion.  Clearly, current management is unable to run such a complex company with so many moving pieces.  If AIG were to be broken up, I would imagine that it could easily follow the Altria (NYSE: MO) example and split into a domestic and international divisions.  This would simplify the company, while at the same time allowing investors to invest in an insurance company that is well positioned in some of the world’s fastest growing markets.

In light of the most recent capital raise and the resulting loss of credibility, I must reiterate my opinion that AIG should trade a percentage to book value and not at book value.  Management simply cannot be trusted.  I would not want to own a position in AIG at its current price.

For Further Review:

Bloomberg Article on AIG

David Merkel's Article on AIG

Disclosure: None