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American International Group (AIG): Story Now Becomes Simpler For Investors

 January 04, 2013 10:10 AM

(By Mani) The story of American International Group, Inc. (NYSE: AIG) is now becoming easier to understand for the investors given the U.S. Treasury's sale of its remaining common stock stake.

Through much of 2012, AIG surprised skeptics. In fact, Wall Street was surprised by the speed with which the U.S. Treasury was able to sell its once 92 percent stake in the insurance company with $45 billion in share sales coming in 2012.

The International Lease Finance Corp. (ILFC) airplane leasing business was also an opportunity to which the market ascribed mixed confidence. AIG has agreed to sell nearly all of its ILFC to a Chinese consortium for up to $4.8 billion.

[Related -American International Group Inc (AIG): Current Weakness Offers A Buying Opportunity]

Finally, AIG no longer holds any stake in AIA following the sale of its final 16 percent holding in mid-December.

"The impending 80-90% sale of ILFC and AIG's disposition of its remaining AIA stake were all secondary issues that complicated the AIG story, but they seem to be receding into the background fading from investor concern. We expect broader participation from investors in the near future," Deutsche Bank analyst Joshua Shanker wrote in a note to clients.

The AIA sale was clearly unexpected. The stock had gapped up 3 percent on Dec. 10, presumably related to the expectation that AIG does not have a use for the proceeds of an AIA share sale with the Treasury no longer holding blocks of stock to sell to AIG. A week later, despite this logic, the final AIA sale was announced.

[Related -American International Group Inc (AIG): Buy This 'Hated' Company While It's Still An Incredible Bargain]

Meanwhile, capital management is still at the forefront and is likely would take three forms: interest expense reduction, share repurchase and implementation of a common stock dividend. There is a perception that interest expense reduction is mutually exclusive to share repurchase.

"It is true that some debt will likely be retired, but AIG can significantly reduce its annual interest costs through debt refinancing without sacrificing liquidity. We expect common share repurchase to resume in 2H13," Shanker noted.

Investors are looking for evidence of improvement in personal and casualty (P&C) results. AIG's P&C business (formerly called Chartis) presented an essentially lousy third quarter result without much in the numbers that investors could describe as progress, made worse by what appeared as multiple large non-catastrophe events.

"4Q12 will also have difficulty showing improvement with a $2B Hurricane Sandy loss marring underlying results. We still expect improvement in P&C combined ratio but recognize that it may not be a 2013 event," Shanker wrote.

However, valuation continues to look attractive with some risk of near-term stagnation. AIG shares continue to hover around 50 percent of book value, and, while there are shortcomings associated with price to book valuations, it is one method among others to suggest that shares seem undervalued.

"We do not expect the BVPS growth witnessed in 4Q11-3Q12 to repeat in 1H13, particularly related to a 2Q12 ILFC charge," Shanker said.

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