AIG CEO to take scalpel soon to big insurer

By Lilla Zuill - Analysis

NEW YORK (Reuters) - American International Group Inc (AIG.N) Chief Executive Robert Willumstad will soon take the scalpel to the world's largest insurer -- and not a minute too soon for investors blindsided by mortgage losses that led to an unexpected $5.36 billion quarterly loss.

Willumstad, who was AIG's chairman before being named CEO on June 15, said he will unveil a plan to dramatically reshape the company at an investor meeting on September 25, three weeks later than promised.

Willumstad, a 40-year banking veteran, intends to cut staff and divest parts of the sprawling company -- but has kept mum on the details.

"A less complex AIG will be a better competitor," he said on a conference call with investors on Thursday.

Analysts are convinced the company has become unwieldy.

"We believe that AIG is simply too large and complex for anyone to fully understand, and that the company could eventually need to be broken into pieces," said Bijan Moazami, an analyst with Friedman, Billings, Ramsey in Arlington, Virginia.

What will AIG shed? Willumstad will try to unload toxic mortgage-linked assets, and divisions where mortgages have drained profits, such as United Guaranty Corp, analysts said.

United, a mortgage insurer, posted a $440 million operating loss in the second quarter.

"AIG waded into waters it did not fully understand. It is typically an insurer, but really spread out into different risky assets that have only now come home to roost," said Byron MacLeod, an analyst with research firm Gradient Analytics. "Certainly we would expect the company to diverge itself of some assets, and focus on its core business."

AIG has recorded nearly $25 billion in unrealized market losses from credit default swaps that guaranteed risky mortgage-backed debt.

For AIG, finding a way to get rid of the credit default swap portfolio would end the costly write-downs it has taken over the past three quarters. But it says it may lose the gains that could come once market conditions improve.

Others in the financial service sector, like Merrill Lynch & Co Inc MER.N, have unloaded distressed assets at fire-sale prices -- 22 cents on the dollar in Merrill's case.

On Thursday, Willumstad gave little hope the mortgage crisis was near an end. The company more than tripled its "worst-case" estimate for credit swap losses to $8.5 billion from $2.4 billion in the prior quarter.

STICK TO INSURANCE

"We expect AIG to refocus efforts on its core insurance units," said Standard & Poor's analyst Catherine Seifert, in a research note.