WALL STREET IS

losing patience with insurance giant

American International Group

AIG's surprisingly large first-quarter loss, reported Thursday, jolted its stock, which fell $3.87, to $40.28 a share, in heavy trading Friday, renewing speculation Sullivan may be booted. In 2005, the mild-mannered Englishman replaced the brilliant, imperious Hank Greenberg, who'd been forced out by an accounting scandal.

AIG, which is near a 10-year low of $38 set in March, might not slip much more because its earnings power in 2009 probably is at least $5.00 a share. But Citigroup analyst Joshua Shanker, who has a Neutral rating on the stock and a $47 price target, wrote in a client note Friday that a recovery could take time because of "weakening fundamentals" in AIG's core insurance operations, and still-difficult conditions in the credit markets.

In February, AIG reported a fourth-quarter loss of $5.3 billion, or $2.08 a share, but suggested that the worst was over. We bought into that argument ("AIG's Sell-Off: a Huge Opportunity," Feb. 18) when the stock traded around 45.

Things have worsened since then. AIG reported a first-quarter loss of $7.8 billion, or $3.09 a share, after taxes. Excluding write-downs in its investment portfolio, the red ink was $1.41 a share, far worse than the consensus estimate of a 76-cent loss.

Core insurance profits were disappointing, reflecting tough conditions in the property and casualty market. AIG's shareholder equity has slid by $24 billion in six months, cutting the insurer's book value to $31.93 a share from $40.81. AIG is joining the parade of wounded financial companies by selling $12.5 billion of equity to bolster its capital.

All this is a big blow to Sullivan, who a year ago boasted that AIG had $15 billion to $20 billion of excess capital. Like other financial companies, it bought high and sold low, repurchasing $5 billion of its stock last year at an average price of $67.

Then there was AIG's dubious decision Thursday to lift its dividend 10%, to 22 cents a quarter. Shanker called the move "ill-timed." The higher dividend will cost AIG $200 million annually. Many had expected a dividend cut to save capital.

AIG long deemed itself superior to other P&C insurers, but it's now capital-starved, while its rivals have ample capital. AIG isn't just a P&C insurer. It sells life insurance in the U.S. and abroad, leases out aircraft, issues mortgages and peddles various financial products. The financial business has been the main problem area; it guaranteed complex mortgage derivatives backed by subprime mortgages, producing almost $20 billion in losses. If there's reason for hope, it's the company's view that its huge markdowns in mortgage derivatives probably will far exceed actual losses.

Sullivan, like former Citigroup boss Chuck Prince, seems over his head running such a large and complex company. AIG should consider shutting AIG Financial Products, but who knows what additional losses lurk inside that poorly understood business?

If Sullivan goes, it's unclear who will take over. AIG's board is unlikely to ring up Greenberg, who just turned 83, because of his age and his run-in with regulators. Greenberg, after all, created the monster Sullivan is trying to tame.

AIG may be a mess, but given the strength of its core businesses, bottom-fishing in its stock could pay off.