AIG Highway to Hell

AIG (AIG) has some well publicized problems. Will we learn from history or are we doomed to repeat it? I did a little bit of a rear view mirror exercise and just reread some of AIG’s press release and conference call comments. The overall conclusion is that senior management kept posturing that the problems are a result of external circumstances such as the collapsing real estate market and sub-prime slime issues.

Management is quite correct in pointing to the external issues. But AIG is an insurance company which supposedly looks at external risk issues, comes to an actuarial opinion and then if possible prices the risk. I believe some actuaries will tell you some risks are not worth underwriting. Just as the rating agencies found a way to do it, AIG also found a way to do it. All of which has caused tremendous financial pain.

One has to wonder if AIG’s board and senior executives were of a mind set to “Handle the Truth”

In chronological order and using quotes from press releases and conference calls.

Feb 28:
American International Group, Inc. (AIG) today reported that its net income for full year 2007 was $6.20 billion or $2.39 per diluted share, compared to $14.05 billion or $5.36 per diluted share for full year 2006. The year over year looks great as this is improving. But wait you need to read the rest of it. The net loss for the fourth quarter of 2007 was $5.29 billion or $2.08 per diluted share, compared to net income of $3.44 billion or $1.31 per diluted share for the fourth quarter of 2006. The adjusted net loss for the fourth quarter of 2007 was $3.20 billion or $1.25 per diluted share, compared to adjusted net income of $3.85 billion or $1.47 per diluted share for the fourth quarter of 2006. Starts to suck doesn’t it.

March 12:
“The Board of Directors of American International Group, Inc. (AIG) today declared a quarterly cash dividend on the company's common stock of 20 cents per share, payable on June 20, 2008 to shareholders of record on June 6, 2008.” The dividend hang time is huge. On March 12 they release information which they hope to price into the stock immediately. But the dividend will be of record almost three months into the future. This comes after year end results were released some two weeks prior which contained bad news.

May 8:
“(AIG) today reported that the continuation of the weak U.S. housing market, the disruption in the credit markets, as well as equity market volatility, had a substantial adverse effect on its results for the first quarter ended March 31, 2008. AIG emphasized that despite the difficult environment and its resulting effect on AIG's overall financial performance for the first quarter, core insurance businesses continue to perform satisfactorily. AIG is confident that, although present economic conditions are difficult, AIG's unmatched competitive advantages, strong brand, and unmatched global franchise position it extremely well for the future.” But they signal to the marketplace that they can increase their dividend rate. The signal indicates financial health not problems. This is done 30 days before the previous dividend has even become of record.

May 8:
“The Board of Directors of American International Group, Inc. (AIG) today declared a quarterly cash dividend on the company's common stock of 22 cents per share. The dividend is payable on September 19, 2008 to shareholders of record on September 5, 2008. This represents a 10 percent increase in the quarterly cash dividend and the twenty-third consecutive year that AIG has increased its dividend.” Within 5 months they are climbing into a government sponsored lifeboat.

May 9:
Martin Sullivan - President, Chief Executive Officer said on the conference call “Excluding these external market issues, the underlying fundamentals of our core businesses remain solid, and several units performed quite well in the quarter.”Not our fault is the attitude. But check out the exchange between Martin Sullivan - President, Chief Executive Officer Jonathan Adams - Oppenheimer Capital when Martin Sullivan told Jonathan Adams. “Well, all I can tell you Jonathan is that obviously, when the subject of the raise in dividend was discussed with the Board, we believe clearly that it reflects the long-term prospects, the positive long-term prospects of the organization and that's really what the decision was based on.

Aug 6:
In the earnings release commenting on second quarter 2008 results, AIG Chairman and Chief Executive Officer Robert B. Willumstad said, "Our second quarter results were adversely affected by the severe conditions in the housing and credit markets and a very difficult investment environment. These results do not reflect the earnings power and potential of AIG's businesses and it is clear that we have a lot of work to do to restore AIG's profitability to where it should be. Still talking the talk of a focused CEO. But focused on what?

Aug 7:
Robert B. Willumstad - Chairman and Chief Executive Officer on the conference call said “The second quarter results do not reflect the earnings power of AIG's businesses.” You have heard this refrain many times.

Sep 23:
AIG suspends dividends after grabbing a huge government lifeline.