American International Group Inc.'s top executive said Wednesday that its exposure to the volatile U.S. residential mortgage market is "manageable" and would not deter growth over the next five years, but another AIG executive said the insurer could be forced to take $600 million of asset writedowns.
"AIG accurately identified all areas of exposure to the U.S. residential housing market," Martin J. Sullivan, the New York company's president and chief executive, said during a presentation to investors. "We are confident in our markets. We can't predict the future, but we have a high degree of certainty in our businesses. We believe our exposure is manageable given our size, financial strength, and our business diversity."
Joseph J. Cassano, the president and chief executive officer of AIG Financial Products Corp., said that, in addition to the $550 million writedown announced in October, AIG expects further writedowns of $500 million to $600 million.
Mr. Sullivan said negative results in the U.S. housing and subprime markets would persist into next year. Despite the fact that several AIG units are invested in consumer finance and mortgage insurance and AIG plans to hold devalued investments until markets recover, he said, the company expects adjusted annual earnings per share growth to be 10% to 12% and annual return on equity to be 15% to 16% during the next five years.
"Our management compensation is tied to that goal, and we think we can hit that target through organic means, and we still will be opportunistic with mergers and acquisitions," he said.
A centralized risk management approach enabled AIG to avoid writeoffs as big as some competitors were forced to take, Mr. Sullivan said. "We have our arms around what is happening at AIG, and we have displayed this with timely and accurate reporting," he said. "Our risk management will come through in our results."
The Wednesday presentation was planned initially to focus on AIG's foreign life insurance and retirement services operations but was shifted to the financial services company's exposure to the U.S. residential mortgage market after AIG last month reported a 13% decline in third-quarter profits, caused in part by its mortgage exposure.
Analysts said Mr. Sullivan is facing heavy pressure from former CEO Maurice "Hank" Greenberg, who they say has been approached by investors dissatisfied that the company's stock price has fallen 22% this year and desirous that the ousted top executive step back in. Mr. Greenberg said in a federal filing in November that he was interested in exploring "strategic alternatives" for AIG with other investors.
AIG reported $864 million of investment losses in the third quarter, and almost half the markdowns were in securities linked to home loans. Its stock rose 7% to $59.33 a share by midday Wednesday.
Jay Gelb, an analyst at Lehman Brothers, estimated after the third-quarter results were released that AIG could announce "another $550 million of negative valuation marks on collateralized debt obligations in October and perhaps another $500 million of losses in mortgage guaranty."
Mr. Sullivan said it is difficult to put "one number" on potential losses among the four AIG business units with exposure to the U.S. residential mortgage market.
These four units are AIG Financial Products Corp.; AIG Investments; the mortgage guaranty unit, United Guaranty Corp.; and the consumer finance unit, American General Finance Inc.
"We have four principal businesses with exposure to the residential markets," he said. "During 2005, there was mounting evidence that lending standards in the U.S. were deteriorating at a startling pace, and we took an effort at that time for each business to respond to this in different ways."
AIG Investments has $93.1 billion of residential mortgage-backed securities exposure; United Guaranty has $28 billion of net risk-in-force exposure; and American General Finance has $19.5 billion of real estate-related receivables exposure, plus $6.8 billion invested in loans originated in 2006 and 2007.
Mr. Sullivan said some of the units pulled out of their investments in the U.S. residential mortgage market altogether while those that could not withdraw "modified their exposure" to favor higher-quality investments. The risk that AIG Financial Products will sustain a loss on its mortgage investments is "close to zero," he said.
Mr. Cassano said his unit pulled back from investing in the mortgage market in 2005 after a "fundamental shift in underwriting standards." He said, "Vintages in the subprime sector are key, and we do not have much exposure to 2006 and 2007 vintages."
