Chartis/AIG in Big Trouble

From the Deal Journal blog at wsj.com:

By Michael Corkery

The government bailout of American International Group may have helped stabilize the global financial system, but look what taxpayers got stuck with: An underperforming, poorly run insurance company.

The latest proof? That would be today’s revelation that AIG has an $11 billion shortfall in reserves to pay workers compensation and business-insurance claims, according to a report today by Sanford Bernstein analyst Todd Bault. That shortfall may not result only in big losses in the coming quarters, it also could cause AIG to lose market share to competitors as consumer worry about the company’s ability to pay claims.

Slashing his price target to $12-a-share from $20 (Remember those hazy summer days when day traders bid up AIG to $53-a-share), Bault says the worst is finally coming true for AIG:

It was viewed by many that AIG’s weakened state would compel clients and brokers to want to move business. We were skeptical of this view because we felt that clients would instead stay put and wait for the uncertainty to pass before making a major decision…..But now, with this loss reserve result, we have a more analytical case to make that AIG may face client flight in the future, driven by fear over its potentially weakened claims-paying ability. That factor seems much more likely to matter to risk managers than what is happening in AIG’s Financial Products unit.

In other words, while AIG’s financial products created the credit defaults swaps and other risky derivatives that brought the company to its knees last fall, it is the shortcomings of AIG’s core insurance business that now could endanger the company’s future–and, by extension, the taxpayers’ $120 billion investment

The latest problems have Bault pining for the days when Hank Greenberg ran the company. “There is even some support to the idea that discipline was lost after…Greenberg left the company,” he wrote in his note, which helped send the stock down 14% to $28.57.

Taxpayers face similar challenges with their investments in General Motors and Chrysler. The government bailed out the auto companies primarily to save thousands of jobs in the Midwest, but after all the back slapping and feel-good patriotism wears off, the day-to-day reality of running troubled auto makers is setting in.

In GM’s case, the company has failed to sell two out of three brands it put up for sale (Saturn and now Saab); its North American sales are running out of steam, even as its international sales pick up. The chances that taxpayers will recover their full investment in Detroit and in AIG are looking increasingly shaky.