American International Group (AIG) Report for 1Q12

American International Group (AIG) reported earnings after the market close 5/3/12. It is an excellent report as our investment thesis remains on track complimented with strong support from a significant improvement in ongoing core insurance operations.

Our thesis is AIG’s management is showing significant progress recapitalizing the company.  We estimate an intrinsic value of about $73/share to be realized in a 3-5 year time frame as the share price currently selling at a discount to book value improves and catches up to book value.

A good way to monitor this investment is to track book value and share price change overtime. The book value will increase through share repurchases and improved operations and the price to book discount will decrease as investors gain confidence in AIG’s recapitalization.

With headlines like:

Associated Press: “AIG posts $3.2B profit in 1Q, up more than twofold”

Financial Times: “Core turnaround helps AIG advance”

Reuters: “UPDATE 2-AIG profit beats estimates as investments gain… EPS on operating basis $1.65 vs $1.12 expected by analysts”

Reported 1Q earnings of $1.65 a share beat Wall Street analyst expectations of $1.12 but revenue came in at $8.69 billion below expectations of $8.96 billion and share price fell.  The drop in revenue reflects insurance underwriting and rate discipline to improve the profitability of the core insurance business overtime. Some Wall Street analysts expressed disappointment that the underlying insurance business did not “outperform”. Talk about missing the forest for the trees!

The stock price is trading down after what I’m calling an “excellent” report; does this make sense? No it doesn’t make sense and I’m not sure why the price is down; today’s job report; the market is down today; the revenue miss; who knows? I’m focusing on the underlying value of the business not today’s share price or Wall Street’s quarter to quarter mentality. For fundamental long term investors we should be happy; the longer the share price remains depressed the more shares the company can repurchase on our behalf at large discounts.

As a wise investor once said: But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you,
not to guide you. It is his pocketbook, not his wisdom,
that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game.”  Warren Buffett: 1987 Berkshire Hathaway Shareholder Letter

Tangible book value increased 8% during the first quarter to $57.68; operations improved significantly but share price remains substantially below book value and estimated intrinsic value. This provides an opportunity to invest with a significant margin of safety. I am buying additional AIG shares on this dip in price.

Portions of the company’s news release (in italics) with clippings from the conference call presentation inserted:

“AIG has again delivered another strong quarter with our core insurance businesses all posting profits,” said Robert H. Benmosche, AIG President and Chief Executive Officer. “We also continue to make good on our promise to help the U.S. Government profit from its investment in AIG. During the quarter, we retired the preferred interests of AIA Aurora LLC (AIA SPV) one year ahead of schedule and achieved the milestone of reducing total outstanding or authorized U.S. Government assistance by 75 percent.

Our intrinsic value estimate is based on the recapitalization of the company derived estimated Net Asset Value (NAV) over the next couple of years. Longer term Earnings Power Value (EPV) will determine the intrinsic value of the company. Although in my view it is too early to determine EPV it is not too early to start following the earnings progress.

…At Chartis, where we had very low natural catastrophe claims, we’re already seeing the benefits of the realigned consumer and commercial geographic structure and our emphasis on growth economies. Chartis’ results also demonstrated progress in strategic initiatives to improve its mix of business, loss ratio and risk selection ultimately increasing the intrinsic value of the franchise.

…SunAmerica is benefitting from its broad portfolio of competitive products, diverse and strong distribution relationships, and continued discipline in product pricing.

United Guaranty made a profit and was successful in the market with its risk evaluation and pricing, while proactively managing its legacy business to reduce delinquency.

Liquidity, Capital Management and Other Significant Developments:

On March 7, 2012, AIG sold 1.72 billion ordinary shares of AIA Group Limited (AIA) and applied approximately $5.6 billion of the proceeds to pay down a portion of the United States Department of the Treasury’s (U.S. Treasury) preferred interests in the AIA SPV, the special purpose entity that holds AIG’s remaining interest in AIA.

In March 2012, AIG’s $1.6 billion of proceeds from the sale of the securities held by Maiden Lane II LLC (ML II) by the Federal Reserve Bank of New York (FRBNY) were applied to pay down another portion of the U.S. Treasury’s preferred interests in the AIA SPV. On March 22, 2012, AIG made a final $1.5 billion payment to pay down the U.S. Treasury’s preferred interests in the AIA SPV in full. The security interests in the AIG assets that previously supported the pay down of the U.S. Treasury’s AIA SPV preferred
interests, including the remaining interest in AIA, the equity interests in International Lease Finance Corporation (ILFC), AIG’s interests in Maiden Lane III LLC (ML III), and the escrow holding the remaining proceeds from AIG’s sale of ALICO to MetLife, Inc., have been released.

In March 2012, the U.S. Treasury completed a registered public offering of AIG common stock in which it sold approximately 207 million shares for aggregate proceeds of approximately $6.0 billion. AIG purchased approximately 103 million of these shares in this offering for an aggregate amount of approximately $3 billion. As a result of the
offering by the U.S. Treasury and purchase by AIG, the U.S. Government’s ownership in AIG was reduced to approximately 70 percent.

During the first quarter of 2012, AIG issued $2.0 billion of long term notes for the Matched Investment Program and ILFC issued $2.4 billion of debt.

Dividends and note repayments from operating companies totaled $2.6 billion in the first quarter of 2012.

AIG Parent liquidity sources amounted to approximately $12.4 billion at March 31, 2012.

The above progress has unencumbered the non-core assets and AIG is now free to deal with those assets as it sees fit. One remaining caveat is AIG will almost certainly be designated a Systematically Important Financial Institution (SIFI); a financial institution whose eventual failure may pose systemic risks to the world economy. In accordance with the Basel 3 framework, SIFIs will likely be subject to enhanced capital requirements. AIG’s management feels it is well prepared for this probable outcome.

After the close of the first quarter, on 4/26/12, The Federal Reserve Bank of New York reported the sale of a portion of the Maiden Lane III portfolio to Barclays and Deutsche Bank. William Dudley, president of the New York Fed, said the sale “represents good value for the public and significantly exceeds the original price paid for these assets”.  Although it will take time to know the full value of Maiden Lane III the good progress continues after the close of the quarter. See The Financial Times report on this sale here.

You can find the full earnings press release here.

You can listen to the earnings webcast and find the presentation here.

What do you think about AIG’s 1Q12 results?


I am long AIG.

The information contained herein is provided for informational purposes only, is not comprehensive, does not contain important disclosures and risk factors associated with investments, and is subject to change without notice. The author is not responsible for the accuracy, completeness or lack thereof of information, nor has the author verified information from third parties which may be relied upon. The information does not take into account the particular investment objectives or financial circumstances of any specific person or organization which may view it. Nothing contained within may be considered an offer or a solicitation to purchase or sell any particular financial instrument. Any investment can be very risky and is not suitable for everyone. You should never enter into an investment unless you can afford to lose your entire investment. Always complete your own due diligence. Before making any investment, investors are advised to review such investment thoroughly and carefully with their financial, legal and tax advisors to determine whether it is suitable for them.

Copyright © 2012 Provalum LLC. All Rights Reserved.



  1. Hi there, great article! Question for you… what are your thoughts on the JAN 2014 options with a strike of 50 trading at $1.00? If book value is, say, $75 by the end of 2013 and we’re trading at 80% of book by then, that would indicate a share price of $60. $60-$50 strike = $10 on $1 investment (10-bagger). Am I crazy on thinking this is a decent risk/reward? What are your thoughts? Thanks, Mark

    • Mark,

      Interesting idea, but in my mind timing uncertainty is an issue with AIG. It appears our investment thesis is on track and the accelerated Maiden Lane Asset sales by the NY Federal Reserve Bank are very positive for AIG. However, the investment horizon is 3-5 years to compensate for timing uncertainty.

      There are a number of macro-economic issues (Europe, US fiscal issues for example) that could derail the slow U.S. recovery, impacting the U.S. markets and delaying the appreciation of AIG. With the JAN 2014 options you are betting AIG’s restructuring is completed and appreciated by investors within 17 months.

      Have you looked at AIG $45 Warrants (AIGWS) now selling around $10.50 with an expiration date of 1/19/21? I am long the warrants as there is 8+ years for the investment thesis to play out and the market to respond. The tradeoff is less leverage for more time, in my view, a better risk/reward. Estimating a $70-125/share price range over the 8+ years the warrants could be a 3-7X bagger. You might want to look at the warrants with more information here:

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