American International Group (AIG) has reported two consecutive quarters of record losses from the subprime mortgage market as well as credit default swaps. As the firm has declared more than $18 billion in losses in the last six months, the stock has plummeted more than 54% in the last year.

There are quite a few agitated shareholders that were concerned about CEO Martin Sullivan’s lack of foresight and risk management for the firm’s many complex investments. Sullivan further lost credibility by claiming that he had discovered a “material weakness” in the company’s accounting standards. That was embarrassingly followed by massive write downs. So, prior to the start of the trading week, AIG finally submitted to the mounting pressure and ousted Sullivan. AIG will be led by current Chariman and former Citigroup executive Robert Willumstad.

Willumstad will have his work cut out for him in untangling the complexity that shrouds AIG. AIG is comprised of a huge insurance business but also operates a large asset-management business, an aircraft-leasing firm, and does business in more than 100 countries worldwide.

Willumstad has said that he will put together a “game plan” going forward which many investors hope will break up the company into a more efficient business. Lending credibility to that notion, Willumstad has been rumored to have discussed returning, “focus to what we do best,” which would suggest a renewed focus on insurance. Willumstad has a reputation as a results driven, straight shooting, bottom-line focused individual, who achieved success even in difficult circumstances while at Citigroup.

While Willumstad might give the ailing company a shot in the arm, it is more likely that those investors who were disappointed in Sullivan’s risk management should hold Willumstad partially responsible as well. He has been the Chairman of the Board since 2005. Interestingly, he will remain in that position as Chairman while also becoming the CEO. This is a direct affront to then Attorney General Elliot Spitzer’s request to have those positions held by separate people; somehow Spitzer has lost some influence of late.

Willumstad will need to stabilize the company, which is currently in freefall, and this effort to stabilize may inhibit his ability to put his own stamp on the company by recruiting his own people for executive positions. Also, Willumstad will need to make an effort to woo AIG’s leader for more than 40 years and largest shareholder with over 11% of shares outstanding, Maurice “Hank” Greenberg.  Greenberg was forced out of the top office at AIG amidst Spitzer’s investigation, and he was a vocal proponent of a change in leadership, even though Sullivan was groomed under Greenberg over those more than 40 years.

It could well take some time before things settle down at AIG, but how much further could the insurance giant drop? From a valuation perspective, we have the stock rated a Buy and it is very nearly a Strong Buy. On a price-to-cash flow basis, the stock historically trades between 16.75 and 25 times cash flow, but the stock is currently selling at 11 times cash. Price-to-sales is an even more pronounced deviation from the normal range; AIG normal trades between 1.6 and 2.4 times revenue but the stock is currently trading at only .74 times revenue.

Based on these normal valuation ranges, we have a long term price target of $58-$70.

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