American International Group (AIG) Reports 3Q12 Results

American International Group (AIG) reported 3Q12
earnings on November 1, 2012
. It was a solid report but near term changes in AIG’s regulatory status and insurance operations may be causing undue concern for some. Beyond the noise our investment thesis remains on track and our margin of safety has improved.

The share price dropped after the 3Q report but has recovered for the most part. Mr. Market’s short term reaction creates buying opportunities for the long term fundamental investor. Looking beyond the noise, a potential 100% gain remains intact followed by a potential return on equity in excess of 20% for the long term investor. Thank you Mr. Market!

In previous posts we discuss AIG’s restructuring. The biggest hurdles are behind us. Capital management and improved operations will be the catalysts for further increases in intrinsic value and closing the gap between share price and intrinsic value. Third quarter results, capital management and operations are discussed below.

Third Quarter Results as Reported:

* Third Quarter Net income of $1.9 billion
* After-Tax Operating Income of $1.6 billion, $1.00 per diluted share
* Growth in Insurance Operating Income of 87% to $1.6 billion
* Book value per share, excluding AOCI, of $61.49, a 10% sequential increase
* Completed $8 billion in share repurchases, $13 billion year-to-date

American International Group, Inc. (NYSE: AIG) …reported net income attributable to AIG of $1.9 billion and after-tax operating income of $1.6 billion for the quarter ended September 30, 2012, compared to a net loss attributable to AIG of $4.0 billion and an after-tax operating loss of $3.0 billion for the third quarter of 2011. Diluted earnings per share and after-tax operating income per share were $1.13 and $1.00, respectively, for the third quarter of 2012, compared with a diluted loss per share and an after-tax operating loss per share of $2.10 and $1.58, respectively, for the third quarter of 2011.

Third Quarter 2012 Key Themes:

Financial Highlights:

After-tax Operating Income (Loss):

Strong Capital Position:

Execution of $13.0 billion in share repurchases year-to-date increased [book value per
share] by $6.47/share.

Liquidity, Capital Management, and Other Significant Developments:

  1. AIG shareholders’ equity totaled $101.7 billion at September 30, 2012.
  2. During the third quarter of 2012, the U.S. Department of the Treasury (Treasury) completed two registered public offerings of AIG common stock for proceeds of approximately $26.5 billion, including approximately $8.0 billion purchased by AIG, reducing Treasury’s remaining investment in AIG to approximately 234.2 million shares of common stock, or approximately 15.9 percent of outstanding shares.
  3. In September 2012, AIG sold approximately 600 million ordinary shares of AIA Group Limited (AIA) by means of a placement to certain institutional investors, for gross proceeds of approximately $2.0 billion.
  4. Dividends and note repayments received from insurance operations totaled $75 million in the third quarter of 2012, with an additional $1.25 billion received during October 2012.
  5. AIG Parent liquidity sources amounted to approximately $11.6 billion at September 30, 2012.
  6. On October 5, 2012, AIG entered into an amended and restated 4-year syndicated credit facility which provides for $4.0 billion of revolving loans (increased from $3.0 billion in the previous facility), and which includes a $2.0 billion letter of credit sublimit.

Capital Management:

The U.S. Treasury’s ownership of AIG shares is down to 15.9% and AIG has entered into the next phase of government oversight. On Oct. 2, 2012 AIG received notice that it is being considered by the Financial Stability Oversight Council as a systemically important financial institution (SIFI) under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The notice informs AIG that it will be reviewed under the most stringent criteria for nonbank financial company determinations. No surprises here; further regulation was largely anticipated and the notice has a silver lining in that AIG’s small bank will not force it under the bank regulations that would be problematic for an insurer.

This determination removes the question on regulation of AIG and makes the Federal
Reserve AIG’s regulator. Federal Reserve supervision has already begun. In my view, another silver lining is these regulations are punitive for minority interest and will provide additional incentive for AIG to divest of AIA and their air craft leasing ILFC both non-core operations. The proceeds could be reinvested into core operations and share buybacks.

During the conference call Bob Benmosche, President and CEO, said; “I am also going to add that people wondered what would happen with our capital management program once that happens [regulatory status is determined]. While our focus has been on share buyback up until now, our focus going forward in capital management working closely with the Fed in terms of what we’re able to do. We’re going to now focus on our coverage ratio and that’s going to be looking at our debt and our ability to cover the debt with earnings”.

Does this change our investment outlook where we assume continued share repurchases? Not really, the book value is already over our 2012 estimate of $63/share and once management is confident internal models of capital requirements meets the
new regulations they will have the freedom to continue shareholder friendly capital allocation as they have demonstrated in the past.

In an earlier post we quoted Barron’s on this subject: “the lower buyback was more a reflection of management taking a more conservative approach in front of obvious Federal oversight, likely holding a bigger capital cushion to ensure that the Fed’s view of AIG’s capital position is similar to management’s view and thus confirming the
opportunity for continued capital management in 2013 and beyond (both from non-core asset sales and operating free cash flow).”

We believe AIG will be overcapitalized and will resume share repurchases and dividend payments once regulatory capital requirements are fully defined. Keep in mind proceeds from the sale of noncore assets (AIA and ILFC) will be on the order of $13 to 14 billion and available for some use. What better use than purchasing $1.00 of AIG’s own assets for $.47?

In response to a question on additional share buybacks and dividend in the conference call Bob Benmosche remarked: “…And I would think that a dividend on the stock probably would be something that if in fact we’re able to do that, I would see that as something we’d like to do in 2013 if our capital position is strong enough, that we can do that. And we won’t know that until the Fed has more time to review where we are”. Another indication they are simply hedging until further clarity on capital requirements under their new regulatory.

Buying $1.00 assets for $.47 is likely the best use of capital management can find once
regulatory requirements are met. I’m willing to wait for the dividend if the
share price remains depressed and the company can use the cash to purchase assets at a 53%  discount. What other investments can they find in today’s environment yielding a 100+% return on every dollar invested? What acquisition can they find where they better understand the risks involved than their own company?


Security analysts following the company reported AIG major insurance divisions; Property Casualty and; Life and Retirement modestly underperformed peers.

Insurance operations at AIG can be improved and they are doing so. The company is transitioning from a near death experience and restructuring as a result of the crises to a streamlined global insurer focused on core insurance operations. OK, so they modestly
underperformed this quarter vs peers but insurance operations are up 87% vs year ago results.

When asked during the conference call: …what do you guys think is a reasonable return given the regulatory environment that now exists post 2008? Bob Benmosche responded in part:… I think we’re absolutely on target from everything we feel right now to the 2015 getting to an ROE of north of 10%. So we feel that that’s achievable. We have a lot of wood to chop to get there and a lot of things we’re building today and that’s the investments of infrastructure and so on that we’re building within AIG, so we feel that that’s still attainable.

Benmosche’s management team has demonstrated outstanding performance over the past few tumultuous years and can now begin to focus on improving core operations. Given the fact you can buy equity (book value) at a 53% discount; we are likely looking at an ongoing return in excess of 20% ROE per year based on today’s cost of equity.

Operating results in the insurance business vary quarter to quarter based on insured losses incurred that quarter. Results must be measured over a long time frame, in fact years, to be meaningful because of these variances.

“Modestly underperform” vs. an ongoing return on equity in excess of 20% is simply the difference between having a short term investment horizon instead of a long term fundamental view.


I am long AIG common stock and AIG warrants.

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.

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