AIG slumps after analyst warns of zero equity value

By Supantha Mukherjee

BANGALORE (Reuters) - Shares of American International Group Inc (AIG.N) plummeted 22 percent on Thursday after a Citigroup analyst said the value of the troubled insurer's equity may fall to zero.

AIG shares, which have fallen more than 50 percent since its 1-for-20 reverse stock split on July 1, were trading down $2.47 at $10.63 in afternoon trade on the New York Stock Exchange.

"After the reverse split, the stock is easier to borrow and more people get access to short it when it is trading at a higher price," said Paul Hickey, co-founder of Bespoke Investment Group in Harrison, New York.

After a series of federal bailouts, AIG, the recipient of $180 billion of taxpayer money, has been struggling to preserve its business operations and sell some of its prized assets to help repay government loan.

The company received another setback this week when a jury ruled against it in the Maurice "Hank" Greenberg lawsuit, dashing the insurer's chances of collecting $4.3 billion in damages.

Citigroup analyst Joshua Shanker said a potential zero equity value for the AIG stock was due to the risk of more credit default swap (CDS) losses and the disposal of key assets at low valuations.

"Our valuation includes a 70 percent chance that the equity at AIG is zero," he said in a note to clients.

Potential markdowns in AIG Financial Product unit's CDS portfolio may result in collateral calls that would again put pressure on AIG's liquidity, the Citigroup analyst added.

Last month, AIG revised its 2008 annual report to add a new risk factor that shows it may recognize valuation losses on a CDS portfolio with notional value of about $193 billion if credit markets continue to deteriorate.

"Such collateral calls could also pressure rating agencies to lower their credit ratings for the company, leading to a similar cycle to the one that the company experienced prior to the massive government intervention in the third quarter," Shanker wrote in a research note.

Shanker said despite AIG's efforts to implement the action plan devised in concurrence with the U.S. government, the uncertainty and risk surrounding AIG remain very real.

The analyst kept his "hold" rating on the insurer's stock and cut his share-price target to $14 from $36 to adjust for the reverse split.

AIG, once the world's largest insurer by market value, nearly collapsed last year because of losses from CDS, a bet on the credit worthiness of a debt issuer.

ASSET SALE WOES

The analyst said while AIG may be able to repay government funds and some debt with core asset sales, the remaining businesses may be those that generate lower return on equity, handicapped by a high debt burden.