American International Group Inc. shares continued to plummet one week after the company approved a reverse stock split and as jury deliberations began in a $4.3 billion trial against its former CEO.
Shares dropped $2.21, or 13.7 per cent, to $13.98 in early afternoon trading. Last week, shares of the New York-based insurance giant went into free fall after a 1-for-20 reverse stock split was approved at the company’s annual shareholders meeting on June 30. Shares of AIG (AIG-news-people) closed at $1.16 that day, which is equivalent to $23.20 assuming the reverse split.
â€œThere’s not a lot to get excited about with this stock,” said Len Blum, managing partner at investment bank Westwood Capital. The stock was a little bit overbought and investors are expecting to see more losses.”
AIG split the stock after the company plunged more than 90 per cent over the past year, saying that a higher price may attract institutional investors who wouldn’t typically buy shares that trade for less than $5.
But that has proven difficult, as AIG disclosed in a regulatory filing last week that it could face additional losses on credit default swaps remaining on its books.
As of March 31, AIG had about $192.6bn outstanding of the swaps, which were primarily written for European financial institutions.
Continued declines in the value of the contracts could have a “material adverse effect” on the insurer’s financial results, according to the filing submitted to the Securities and Exchange Commission.
Credit default swaps are essentially insurance contracts protecting an investor against default on an underlying investment, such as mortgage-backed securities. Underwriting of the risky contacts were at the heart of AIG’s near collapse last fall when it took an initial $85 billion bailout from the government to remain in business
AIG has since received additional loan packages from the government, which now total $182.5 billion. The government has received an 80 per cent stake in the insurer as part of the loan package.
The swaps remaining in AIG’s portfolio consist mostly of protection against default on underlying corporate loans and residential mortgages.
As the value of those underlying loans and mortgages fall or they default, the value of the swaps would decline as well. That would force AIG to take unrealized losses on its portfolio.
AIG is in the process of shedding assets and spinning off some of its subsidiaries in an effort to repay the government and return to profitability.
It is also hoping to use proceeds from a multibillion trial in which AIG has accused former CEO Maurice “Hank” Greenberg, through a company called Starr International that he controls, of plundering an AIG retirement program composed of $4.3 billion in stock in 2005.
The questions being raised during the civil trial in federal court in Manhattan boil down to who controlled the fund, and what its purpose was.
Blum said the trial has little, if anything, do with Tuesday’s stock drop.
If Greenberg’s company is found liable, “I would think that would be good for AIG,” he said.