Monday, November 30, 2009

American International Group: AIG Reserves Deficient - Sanford Bernstein (AIG)

In very early pre-market trade the stock is down $1.38 at $33.30.
From Notable Calls:
Sanford Bernstein is out with pretty negative comments on American International Group (NYSE:AIG) lowering their target to $12 from $20 after loss reserve analysis. Firm maintains their Undeperform rating on the stock.

Firm notes they conducted a segmented industry loss reserve analysis to see if it revealed any possible competitive issues that could emerge in the coming years. The main result is a letdown for the possibility of near-term pricing improvement. Every company subgroup—large publics, mutuals, reinsurance & international, and small privates—shows strong and relatively comparable loss reserve adequacy to the other segments. This means that no subgroup is more likely than another to outlast the soft market.

− In particular, average industry reserve adequacy of about 8 points of 2008 earned premium ($26bn dollar adequacy) ranged 4-14% across 4 industry subgroups they looked at. For the large US public companies in their coverage (excluding AIG), the average adequacy is about 11 points, concentrated in commercial lines and specialty businesses.

But they did reveal a very unexpected result that could have major ramifications in coming year. It appears that AIG's loss reserves are significantly deficient again, much sooner that they would have forecast 2 years ago....

...Notablecalls: AIG appears to be vulnerable here. I don't think people were ready for what Sanford Bernstein has to say this morning. If AIG's loss reserves are significantly deficient again, some odd $2 billion asset sales (as reported today by Financial Times) ain't going to help much.

This is negative for the whole financial system, I believe.
I expect AIG to trade down today. Could trade to $32 or possibly even lower.