Sunday, August 17, 2008

AIG is not out of woods yet

Q2 earning highliths --total rev 20 bil vs 31 bil last year, net income -5.4 bil vs 4.3 bil last year --net realized capital loss 6 bil; unrealized market valuation loss on AIGFP super senior credit default portfolio is 5.6 bil Analysis --The bulk of net realized capital loss goes to other-than-temp impairment. Majority of impairment is from security lending portfolio, whose existing exposure to Mortgage and Assete backed invested collateral is around 36 bil vs 41 bil Q1 08. This might weigh on the company earnings if housing market continue to worsen. --The exposure of AIGFP super senior credit default portfolio might be another bomb. The FV of the portfolio in Q2 08 is around 26 bil. But its notional amount is ~447 bil. Highly probably AIG is on the long risk side. If financial market condition deteriorates and more companies go defaults on their deb obligations, AIG will have a cold feet. --The company fundamental is not looking so bright. Its CDS exposure along might suffer another loss of around 10 bil, assuming 8% default and 40% severity loss. --Short the company debt and equity.

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