You are on page 1of 3

AMERICANINTERNATIONALGROUP(AIG) $30.

96onMay15,2012bycablebeach
Price: SharesOutstanding(inM): MarketCap(in$M): NetDebt(in$M): TEV(in$M):
Description: InvestmentOverview WerecommendestablishingalongpositionintheequityofAIG,whichisinthelaterstagesofitsexitfromgovernmentassistanceand makingprogressinimprovingtheprofitabilityofitscoreinsurancefranchises. WiththesaleandequitybuybackannouncedfollowingQ12012results,USgovernmentownershipfellto61%ofoutstandingsharesinMay 2012.WeestimatethatbytheendoftheyearAIG,throughdisposalofnoncoreassets,willgenerate$15 $20bincash,whichitcanuseto repurchasesignificantadditionalsharesfromtheTreasury.AtthecurrentpaceofsharedisposalbythegovernmentandrepurchasebyAIG, webelieveAIGwillbelessthan50%ownedbythegovernmentlaterthisyear,andcompletelyfreeofTreasuryownershipbyendof2013. WebelievethatonceTreasuryownershipfallsto30%,thiswillremoveasignificantoverhangontheshareperformance,asthemarketturns itsattentiontoitsderiskedandgraduallyimprovingbusinessmodel.WeexpectAIGtohit$40bytheendofthisyear.Sharerepurchases inconnectionwithgovernmentdivestitureswillpushAIGbookvaluepershareto$75bytheendof2013,andweexpecta$50stockpricein 2013asimprovementsinAIGcoreinsurancebusinessestranslatetoahigherROE.IfexpectationsarethatROEswillimproveto1012%, thenvaluationsshouldapproachbookvaluein2014. AIGhasmadegreatstridesinextractingitselffromtheseveralformsoffinancialassistancewhichitwasforcedtotakeduringits$150b+ bailoutinthefallof2008.Specifically,in2011andearly2012AIGrepaidandterminatedthe$21blineofcreditfromtheFederalReserveand the$26bnoncontrollinginterestsincertainspecialpurposevehiclesholdingstakesinformersubsidiariesAIAandALICO.ThisyearAIGalso fullypaiddownthe$20bMaidenLaneIISPVwhichhelddistressedmortgagebackedsecurities.Laterthisyearthefinalportionofthe$24b MaidenLaneIIISPVwhichholdsCDOs,isexpectedtoberepaid.Inthepastyear,theTreasuryhassold596millionofthe1,655million sharesitreceivedinconnectionwiththebailout(36%ofitsstake). Thus,asofMay2012theonlygovernmentassistanceiscomprised ofanapproximately$30bcommonequitystakeandaliquidatinginterestinMaidenLaneIII.Thisrepresentssignificant progressinrepayingthe$150b+bailoutin2008,andwithinthenextyear,AIGshouldbecompletelyfreeofUSgovernment assistanceorownership. InMay2012,theGAOreportedthatthegovernmentexpectstomakeover$15bprofitonitsbailoutofAIG. NearTermCapitalManagement AIGisintheprocessofdivestingthreenoncoreassetswhichwillgenerateover$15bindeployablecash. 1. Remaining19%interestinAIA(AmericanInternationalAssurance,theHongKongbasedlifeinsurancecompanyspunoffbyAIGin 2010andnowpubliclytraded),worthover$8b.ThesesharesaresubjecttoalockupwhichexpiresonSeptember4,2012. 2. Completionofthewind downofMaidenLaneIIIisexpectedtogenerateover$6b.MaidenLaneIIIisaspecialpurposevehicle2/3 ownedbytheFederalReserveand1/3byAIG.TheFederalReserveisactivelymarketingassetswithintheSPV,with16%ofthe portfoliosoldinMayandmoreputupforsalerecently.AtthecurrentpaceofdispositiontheMaidenLaneIIIvehicleshouldbefully wounddownbytheendofthisyear. 3. IPOofILFCcouldgenerateadditional$3 4bofcash,asearlyasthisyear.ILFCistheaircraftleasingdivisionofAIG,withbookvalueof over$7.5b.AIGhasdesignatedILFCasanoncorebusinessandfiledanS 1,buthasdelayedtheofferinguntilmorefavorablemarket conditionsprevail. AIGhasused$5btotalofcashtopurchasesharesfromtheTreasurysimultaneouswiththetwomostrecentsalesofTreasurysstakein MarchandMayofthisyear.WeexpectAIGcontinuestopurchase50%ofthestocktobesoldbyTreasury(currentlyworthapproximately $33b).Theproceedsfromthethreeassetssalessetforthabove,togetherwithAIGs$1b+perquarterearningspower,willgiveAIGample resourcestoeffectsuchfuturebuybacks. ADe RiskedandSteadilyImprovingBusiness AIG scoreinsuranceoperationsarecomprisedofthreebusinesses:Chartis(globalpropertyandcasualtyinsurer),SunAmericaFinancial Group(SAFG)(aUSlifeinsuranceandinvestmentservicesprovider)andUnitedGuaranty(MortgageInsurance). Chartisisoneoftheworldsleadingprovidersofpropertyandcasualtyinsurance,offeringadiversemixofconsumer(41%ofpremiumsfor MRQ)andcommercial(59%)lines.ItoffersinsuranceinUSandCanada(47%)aswellasAsiaPacific(primarilyJapan)(28%)andEurope, MiddleEastandAfrica(25%). ReportGenerated: 5/15/2012

$30.96 1,728 53,513 73,779 129,308

EarningsPerShare: P/E: P/FCF: EBIT(in$M): TEV/EBIT:

2011 $9.44 3.3x N/A $5,788 22.3x

2012 $3.70 8.4x NA $9,500 13.6x

ValueInvestorsClub

Page 1 of 3

www.valueinvestorsclub.com

Chartis sfinancialperformancesincethefinancialcrisishasbeenuneven.Itscombinedratio(lossratioplusexpenseratio)hasbeen elevated,inpartduetocatastrophiclossessuchastheJapaneseTsunamibutalsoduetopoorproductpricinginprioryears.Moreover, Chartishashadtostrengthenitsreservesbyover$6billionduring2009and2010forcertainlongtaillines(excesscasualty,asbestos,and

ADe RiskedandSteadilyImprovingBusiness AIG scoreinsuranceoperationsarecomprisedofthreebusinesses:Chartis(globalpropertyandcasualtyinsurer),SunAmericaFinancial Group(SAFG)(aUSlifeinsuranceandinvestmentservicesprovider)andUnitedGuaranty(MortgageInsurance). Chartisisoneoftheworldsleadingprovidersofpropertyandcasualtyinsurance,offeringadiversemixofconsumer(41%ofpremiumsfor MRQ)andcommercial(59%)lines.ItoffersinsuranceinUSandCanada(47%)aswellasAsiaPacific(primarilyJapan)(28%)andEurope, MiddleEastandAfrica(25%). Chartis sfinancialperformancesincethefinancialcrisishasbeenuneven.Itscombinedratio(lossratioplusexpenseratio)hasbeen elevated,inpartduetocatastrophiclossessuchastheJapaneseTsunamibutalsoduetopoorproductpricinginprioryears.Moreover, Chartishashadtostrengthenitsreservesbyover$6billionduring2009and2010forcertainlongtaillines(excesscasualty,asbestos,and workerscomp).ThispoorperformanceledtodoubtsaboutChartissearningspoweraswellasthesufficiencyofitsreserves. MostrecentdatafromChartishasshownimprovementinpricing(NorthAmericanpricingup5%inQ1)andbusinessmixasChartisisde emphasizingitslessprofitablelongertaillines.Lastyear,ChartissoldoffitsasbestosexposuretoBerkshireHathaway,furtherreducingits tailrisk.Inthepastfourquartersprioryearlossreservedevelopmenthasbeendeminimis(lessthan1/10of1%oftotalreserves),giving supporttoAIGsclaimthatthereserves(atover$67basofQ12012)areadequateandwillnotseethemultibillionreserveadjustments seenin2010or2009. CompanymanagementhassetforthaspirationalgoalsforChartis,thatby2015itscombinedratiowillbebetween90and95andits unleveredreturnonequitywillbe10 12percent.Thecompanyrepeatedonitsmostrecentearningscallthatitisontracktoachievingthese goals,drivenbytheaforementionedimprovedpricingandtacticalshiftinbusinessmix,butwithcombinedratioatastillelevated102,itwill takeseveralmorequartersforthisimprovementtoflowthroughtothebottomline. ThecurrentlowinterestrateenvironmentisalsoadragontheearningspowerofChartis,andfortheP&Csectorasawhole.Lowinterest ratesconstraintheabilityofChartistoearnanattractivereturnonitsinvestmentportfolio,which,withacombinedratioataround100, representsalloftheprofitfromthedivision.AhigherinterestrateenvironmentwouldbeacatalysttoChartismorequicklyhittingits aspirationalROEtarget,whichlikelycannotbemetwithpricingincreasesalone. SAFGsellsavarietyoflifeinsuranceandretirementproducts.ItslifeinsurancedivisionAmericanGeneralhashistoricallybeenrelatively stableandslowgrowing,withoperationsfocusedontermanduniversallife.SAFG sretirementservicesofferingsaresoldbyitsVALIC, WesternNationalandSunAmericaRetirementMarketssubsidiaries.ThekeydriversofprofitabilityforSAFGarethespreadonitsinvestment portfolio,andthemortalityandsurrenderratesversusactuarialassumptionsinthelifebusinessandinvestmentflowsintheretirement servicesbusiness.Alowinterestrateenvironmenthasbeenthemajorheadwindforthedivision,asthisreducestheabilityofSAFGto generatepositivespreadonitsinvestmentbook,andalsoisanegativetoinvestmentflowsintheretirementbusiness.Nevertheless,SAFG hasbeenabletoweatherthischallengingoperatingenvironmentwell,withrelativelystableinvestmentyieldandprofitabilityandsteadily increasingAUM.SAFGrepresentscloseto$35binbookvalueforAIG. UnitedGuarantyisAIG smortgageinsuranceguarantybusiness.ItcoversmortgagelendersforfirstlossonhighLTVmortgagesit previouslyprovidedinsuranceforsecondlienItrepresentsasmall(2%)portionofAIG sbookvalueat$2.4bandwasprofitableinitsmost recentquarter. ItshouldbenotedthatAIGhasnearlycompletelyexitedthefinancialproductsbusinesswhichnecessitatedthebailout.In2008,AIGhad $1.8trillioninnotionalderivativesexposurefromover35,000positions,including$305bincreditderivativeliabilities.Asoftheendof2011, AIGhadfewerthan2,000openderivativepositions,representinganotionalderivativeexposurethathadfallenbelow$200billion,thebulkof whichisfullyhedgedandinwinddown. Valuation AIGhasabookvalueof$59pershareaftertherecentlyannouncedsharerepurchase.AssumingAIGrepurchaseshalfoftheremaining Treasuryownershipofapproximately1billionsharesatanaveragesharepriceof$35(aboveitsmorerecentpurchaseat$30.50pershare), AIG sbookvaluepersharewouldbe$70.Addingintheapproximately$8binearningsAIGshouldgeneratethroughmiddleof2013(when weexpecttheTreasurydivestitureandsharerepurchaseprogramtobecompleted),AIGsbookvaluepersharewillbeover$75. AIG scurrentROE(strippingout1timeitems)is6%givena10 12%costofequitythiscansupporta$40sharepricewithinthenextyear. Asumofparts analysisofitsvariousbusinesses,assigninga0.8xmultipletothebookvalueChartis($22)anda0.7xmultipletothebook valueofSAFG($14),togetherwithits$16billiondeferredtaxasset(expectedvalueof$6),canalsosupporta$40+pershareprice(value ofnoncoreassetsoffsetsdebtandotherliabilities,tocompletethesumofparts). The0.8xmultipleforChartisrepresentsadiscountto the1.0xP&Cpeergroup(notethatindustryleaderChubbtradesabove1.25xbook).The0.7xmultipleforSAFGisinlinewiththeaverage ofitsLifeInsurancepeers. However,webelieveAIGismakingsubstantialprogresstowardseventuallyachievingitsaspirationalgoalof10%+ROE(inlinewithmost largecapinsurers).UnderascenariowhereAIGisabletoliftitsROEabove8%,a$50+sharepriceisclearlyachievable,whichweexpectto occurbytheendof2013.NotethatanROEliftwillbeassistedbythecompanysrepurchaseof2530%ofitsoutstandingsharesata50% +discounttobook.Theinvestorpaying$50in2013willbeinvestinginaninsurancecompanywithabookvalueof$80+persharewithin theyearandahigherinterestrateenvironment,supportingafurtherimprovedROE. KeyRisks DelayedturnaroundforChartis
l

Needforadditionalreservesorelevatedcombinedratiowouldtriggeranegativemarketreaction
Page 2 of 3
ReportGenerated: 5/15/2012

HealthofCEOBobBenmosche ValueInvestorsClub
l l

www.valueinvestorsclub.com

FormerCEOofMetLife,hiredbyAIGin2009,age67 In2010AIGannouncedthatBobBenmoschehadcancer(typeundisclosed)andwasreceivingtreatment

KeyRisks DelayedturnaroundforChartis
l

Needforadditionalreservesorelevatedcombinedratiowouldtriggeranegativemarketreaction

HealthofCEOBobBenmosche
l l l

FormerCEOofMetLife,hiredbyAIGin2009,age67 In2010AIGannouncedthatBobBenmoschehadcancer(typeundisclosed)andwasreceivingtreatment HehasremainedasCEOduringtreatmentandhasannouncedheintendstostayonatleastthrough2012hehasbeenasteadyhand andnoclearsuccessorhasbeenidentified

Persistentlylowinterestrates
l l

Lowinterestratespresentachallengetogeneratepositiveinvestmentreturns AspirationalROEtargetsmaybedelayedifratesstaylowbeyondthe2014timeperiod

Sifistatus
l

WeexpectAIGtobenamedanonbankSifi(Systemicallyimportantfinancialinstitution),whichwillentailoversightandstress testing bytheFederalReserve WhileAIGisbeingtransitionedtoFederalReserveoversight,thismaylimitordelayAIG sabilitytoreturncapitaltoshareholders

Catalyst:
l l l l l

Treasuryownershipfallsbelow50%(laterthisyear) Treasuryownershipfallsbelow20%andtozero(nextyear) RealizationofproceedsfromsalesofAIA,MLIIIandILFC(thisyear/nextyear) Chartisbusinessmodelimprovementevidentfrommeaningfulmoveincombinedratioandoverallprofitability(nextyear) IncreasinginterestratesleadtohigherinvestmentyieldsandROE

ValueInvestorsClub

Page 3 of 3

ReportGenerated: 5/15/2012

www.valueinvestorsclub.com

You might also like