AIG CEO Says He Will ‘Take a Scalpel’ to Reshape Giant Insurer

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American International Group’s 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 Sept. 25.

Willumstad, a 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 recent call with investors.

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.”

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

Willumstad said in June that AIG’s insurance business was its “core franchise and (its) core skill set.”

“The question is are they going to sell their winners and keep their losers?” said Gradient’s MacLeod. While that would boost coffers, it would hurt the balance sheet, he said.

To balance the hefty charges that would be connected to divesting liabilities, Willumstad may have to sell profitable businesses for capital. AIG has already raised in excess of $20 billion, but ended the second quarter with less capital than at the end of the first quarter.

One survivor will likely be its highly profitable aircraft leasing unit, International Lease Finance Corp.

Willumstad told investors recently that he is in frequent contact with the former CEO, Maurice “Hank” Greenberg, who remains AIG’s largest controlling shareholder.

The insurer added about 19,000 staff between 2005 and 2007, which it said was needed. Greenberg, who left AIG in 2005 after regulators alleged accounting improprieties, said the increase was equivalent to adding “two army divisions.”

AIG has started to warn staff that cuts are coming, according to several people with knowledge of the situation who asked not to be named. “Morale is at an all-time low — everyone feels incredibly insecure,” said one employee.