Treasury Exits AIG; Valuation Update

The U.S. Department of the Treasury announced that it is offering all of its remaining 234 million AIG shares for sale at $32.50/share for a total $7.6 billion. The offering is expected to be completed on Friday. This sale ends government ownership and combined with the recently announced International Lease Finance Corporation (ILFC) sale will eliminate the remaining major uncertainties surrounding the company.

This closes out a tumultuous chapter in AIG’s history and ends the government’s financial support of AIG. The bailout, one of the largest of the financial crisis, caused outrage from many but resulted in a successful outcome stabilizing financial markets at the time and now with the restructuring of the company. AIG is much smaller and can get back to focusing on core insurance operations.

Share Repurchases:

Departing from past practice, it appears AIG is not buying any of the shares in this offering. They typically announce repurchases concurrent with the Treasury’s sale announcement and no mention was made in AIG’s acknowledgement of the Treasury’s sale. The table below show AIG has repurchased about 25% or $8.0 billion of the government shares.

The asking price of $32.50 is very attractive at about 49% of book value and similar to the discount of previous repurchases by AIG. The ILFC sale ($4.3 billion) and planned divestiture of AIA shares ($6.1 billion) provides more than enough liquidity to repurchase all the remaining shares. CEO Robert Benmosche and his management team previously recognized the merits of the share repurchases at these price levels so why are they passing on the final offering? Time will tell, but as discussed before, perhaps management is preparing the company financially for the new regulations under their Systemically Important Financial Institution (SIFI) designation. In any case once SIFI requirements are defined and met additional share repurchases on the open market can resume if still economically attractive.

Valuation Change:

Although fewer shares were repurchased than we hoped for (25% vs. 50%), sustained lower pricing and improvement in other areas offset much of the share repurchase shortfall. AIG’s intrinsic value has declined about 9% from our average our original thesis average of $72.82/share to $66.39/share. The table below shows the updated intrinsic value with the impact of the ILFC sale and apparent final share repurchases.

Management indicated during the 3Q12 conference call that debt reduction would become a higher priority. AIG’s debt to equity ratio will decline from 0.72 to 0.51 as the debt heavy ILFC unit is divested. Although disappointed in the lower share repurchases; there remains a significant margin of safety and the potential for a large gain with less uncertainty. AIG continues to be an excellent investment opportunity in my opinion.

Completion of the restructuring, the government exit, focus on insurance operations and the prospects of a dividend next year will likely catalyze the increase in share price we expect.

Disclosures:

Long AIG 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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