Greenberg's letter to AIG's board
"AIG is in crisis"
Dear board members:
As AIG's largest individual shareholder, I am as concerned as millions of other investors as I watch the deterioration of a great company. As you know, I am also chairman of Starr International, AIG's largest shareholder.
AIG last week announced a net loss for the first quarter of 2008 of $7.81bn, or $3.09 per diluted share. It is the worst performance in AIG's approximately 40-year history – and follows almost equally poor results from last quarter, which was the worst quarter in the company's history before this quarter. Over the last twelve months, shareholders of AIG have lost $80bn in the aggregate.
Several top shareholders of AIG have called me expressing deep concern about the persistent and seemingly endless destruction of value at AIG. They, and I, are deeply distressed by the excessive loss of value.
The facts are disturbing, for example:
- On December 5 2007, management announced that the cumulative decline in the value of its super senior credit default swap portfolio was between $1.4bn and $1.5bn as of November 30 2007;
- On February 11 2008, that same estimate was increased by $4.5bn to approximately $6.0bn, and the company announced that the auditors found a material weakness in its internal controls over financial reporting and oversight;
- On February 28, 2008 (two weeks later), the company updated its estimate to reflect further valuation declines through December 31 2007, and increased the cumulative valuation loss to $11.5bn on the same portfolio. Leadership reiterated, however, that the company had $15bn to $20bn of excess capital;
- With the release of first quarter earnings on May 8 2008, AIG announced that the portfolio lost an additional $9.1bn in value – and the company would need to raise $12.5bn in capital.
These events have led to a complete loss of credibility with the investment community and even further loss of value for shareholders.
AIG has not articulated why it has chosen to raise approximately $12.5bn in the capital markets rather than pursuing other paths, such as the divestiture of non-core assets (several specific options spring to mind) or the infusion of capital from sovereign wealth funds or private equity funds – paths pursued by other large, diversified US financial institutions. Shareholders deserve to know how this decision was reached and what other alternatives were considered and evaluated.
At the same time as it announced that it would raise new capital, AIG announced an increase in the dividend by 10%, to 22 cents per share. This is expected to cost over $200m on an annualised basis. Furthermore, capital continues to be needlessly consumed through the conversion of branch operations into subsidiaries in various jurisdictions – simply ending this practice would help shore up the company's capital.
The company's problems are more than financial and extend far beyond its subprime credit exposure or approach to capital management. Core businesses are also deteriorating. US life operations are stagnant. The company has lost its leading and unique market positions in China and Japan. The life business in Asia had been a crown jewel, but now the company's position has eroded. In Taiwan, the company must now find up to an additional $1bn to cover losses. To what extent are Taiwan losses due to regulatory changes, as has been suggested, and to what extent are they attributable to the failure to hedge certain non-Taiwanese dollar denominated investments? The company's general insurance loss ratio is up from 64.2 to 70.4, and the expense ratio is up 3.1 points on a quarter-on-quarter basis, from 23.3 to 26.4. At the end of 2004, it was approximately 20. Lastly, in the more than three years since I left, AIG has added 24,000 employees, many in cost centre functions. This is the equivalent of two Army divisions.
AIG is in crisis. The company's shareholders need to absorb the significance of the company's first quarter losses. They also need time to consider the board's response to the crisis and the issues raised by this letter. For this reason and others, a postponement of this week's annual meeting should be considered, so that all shareholders can give careful thought to how best to move AIG forward.
I look forward to your response.
Maurice R Greenberg