(By Mani) Shares of American International Group, Inc. (NYSE:AIG
) have increased 30.60 percent year-to-date and also outperformed S&P 500 as investors are expecting an accelerated share repurchase of $15 billion to $20 billion in the second half of 2012, a positive for its EPS.
AIG, which had repurchased $3 billion and $2 billion of common shares in March and May, respectively, is positioned to engage in further capital management, given potential noncore asset sales and monetization. AIG's noncore assets estimated to have a combined carrying value of about $23 billion.
At recent annual shareholder meeting, CEO Robert Benmosche said AIG intends to liquidate the remaining 18 percent AIA stake fully, which was valued at about $7.2 billion as of June 30, once the lockup agreement expires on Sept. 4.
Also, the Federal Reserve has been gradually disposing its Maiden Lane III assets. Since April, the Federal Reserve has auctioned off Collateralized debt obligations (CDOs) with about $26.8 billion of notional value out of the $46.8 billion at the end of the first quarter.
The cash proceeds from recent asset sales fully paid down the Federal Reserve's loan to the Maiden Lane III joint venture. Once the portfolio is fully liquidated, AIG is entitled to its $5.6 billion equity interest plus one-third of the residual value.
"With the pending sale of its remaining AIA stake and a possible full liquidation of Maiden Lane III by 4Q12—in addition to other likely non-core asset sales/monetization—we think AIG could potentially repurchase $15-20B of common shares (or 24-33% of market cap) in future U.S. Treasury secondary offering," UBS analyst Andrew Kligerman wrote in a note to clients.
Kligerman said the next share repurchase would likely be much bigger in size, given regulatory constraint, as opposed to the previous $3 billion and $2 billion of share repurchases.
AIG expects that once the U.S. Treasury's ownership in AIG falls below 50 percent, it will be regulated by the Federal Reserve Bank—which may limit AIG's ability to repurchase shares, as any capital management decision will likely be subject to the Fed's approval.
"As such, we think AIG will maximize the impact of its next share repurchase," the analyst noted.
Moreover, AIG would see robust EPS accretion from possible outsized share repurchase. Assuming a $20 billion share repurchase in the third quarter of 2012 at today's closing price, Kligerman expects an EPS accretion of about 21 percent to 2013 earnings estimate.
Though, the prospect of an outsized share repurchase as a favorable near-term catalyst, the longer-term value of AIG's share price is highly dependent on the performance of its core insurance segments - Chartis and SunAmerica. In addition, SunAmerica's performance could be pressured, as low interest rates may prove to be a dampener for the unit.
Chartis segment may find it difficult to achieve a 90 to 95 percent combined ratio by 2015 due to the modest insurance rates and potential for adverse loss reserve development for the competitive 2008-2010 accident years.
"Although AIG showed solid progress in 1Q12, we think its "aspirational goal" of 10%+ ROE by 2015 remains a challenge," Kligerman added.