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American International Group (AIG)
AIG Shares Rebound After Small Write Off Announced
American International Group (AIG) announced that it was not as exposed to subprime loans as much as other financial companies, prompting a sigh of relief from investors who had already seen billions of dollars in write offs in the last few months. Residential mortgage backed securities did take a 2% hit (about $1.7bn), but this represents a small portion of the company's securities portfolio. AIG can thank its lucky stars that its foray into mortgages consisted of direct investment in the loans rather than exposure through more complex derivatives. Still, a write off is a write off. What should investors expect from the insurance giant in the future?
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Shares of AIG have still taken a major hit in 2007, especially since October. Because the company was not as exposed to loans made to borrowers with bad credit as some other lenders, shares didn't fall as much as other financial companies, such as Merrill Lynch (MER: Charts, News, Offers), Bear Stearns (BSC: Charts, News, Offers) or Countrywide (CFC: Charts, News, Offers). This didn't prevent investors from worrying about the company's financial health: since other financial companies indicated that write offs were on the horizon, everyone expected the same to happen to AIG. The assumption wasn't out of the blue: the company sells mortgage insurance, holds subprime mortgages in its mortgage portfolio, holds derivatives of lower tranch credit, and sells mortgages.
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In late October the company's debt protection costs jumped 75%, sending option prices into disarray. The debt protection news was followed by a dismal announcement on November 7th: net income during the 3Q was down 27%. Third quarter net income in 2006 was $4.22bn, compared to this quarter's $3.09bn. A major culprit was the company's mortgage and derivatives units, which both reported operating losses. Shares hit a two-and-a-half year low on November 21st, prompting some investors to wax poetic about Hank Greenberg, the company's former CEO who was forced out after being investigated for fraud. The case might even force Warren Buffett to testify.
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Since hitting the low shares have bounced back 14% AIG recently completed its acquisition of 21st Century Insurance Group, and initiated bids for Wurttembergische und Badische Versicherungs-AG, a German insurance company. Much of the company's good news is coming from abroad, including a stake in the Northern Rock bailout. The company forecasts EPS growth of 15% over the next five years, and that the company's insurance and financial service divisions would offset any losses experienced during the recent credit crunch.
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