AIG Still a Risky Bet for Investors
AIG, which is nearly 80 percent owned by the U.S. government, owes taxpayers more than $100 billion. That along with other debt makes it vulnerable to external shocks and shareholder dilution, analysts said in interviews this week.
AIG’s general insurance and U.S. life and retirement operations, Chartis and SunAmerica Financial Group, are faced with economic uncertainty, soft pricing in the property and casualty market, and problems of its parent. These issues make it hard to project AIG’s future earnings power.
“There is indeed some value for shareholders and some value that has been created by this recent management team,” UBS analyst Andrew Kligerman said. “However, the issue for somebody buying the stock today is defining that value.”
AIG’s highly volatile stock is up about 24 percent this year, compared with a roughly 2 percent rise in the S&P Insurance Index. Short interest in the stock — which measures the portion of investors betting the shares will decline — has fallen more than 40 percent since March.
Bruce Berkowitz’s Fairholme Capital Management has built up its stake in AIG this year to 24.3 percent, becoming the largest private shareholder.
Retail investors might have taken their lead from Berkowitz, named domestic stock manager of the decade by Morningstar, but his investment has left many institutional investors scratching their heads.
“They don’t understand his logic. Many of them think it’s flawed,” Kligerman said.
Berkowitz declined to be interviewed for this article.
“AIG has stabilized,” CEO Robert Benmosche told Reuters last week after the insurer posted better-than-expected results.
AIG reported second-quarter earnings, excluding special items, of $1.3 billion last week. Including charges, the company reported a net loss of $2.7 billion.
The run-up in stock means there may be little upside left even for investors with a high risk appetite, analysts said.
“When I look at it vis a vis other insurance companies, there is not a compelling value here,” said Catherine Seifert, an analyst at Standard & Poor’s Equity Research.
According to some metrics, AIG may appear cheap. It trades at about 9.9 times 2010 estimated earnings, compared with an insurance industry average of 10.7 times, according to Thomson Reuters data. The estimates are based on a small number of analysts who still follow AIG.
Seifert calculates AIG’s tangible common equity — common shareholder’s equity taking out goodwill and deferred acquisition costs — to be a negative $38.92 a share as of June 30, which means there is nothing left for shareholders.
Government Entanglement
Fifth Third Asset Management sold off its AIG shares in September 2008 as the insurer was brought to its knees by collateral demands from banks on credit default swaps.
The asset manager has stayed on the sidelines ever since, waiting for clarity on how AIG will be unhooked from its $182.3 billion life support, Chief Investment Officer Keith Wirtz said.
AIG, which now has a market capitalization of about $5 billion, has not drawn down the entire aid package and does not have to pay back investments in two special vehicles that were created to bail it out.
AIG must pay back a Federal Reserve Bank of New York credit facility, the Fed’s preferred interest in two AIG units and equity held by the U.S. Treasury Department, which totaled $101.2 billion as of June 30.
Benmosche said last week that the company has begun talks about a strategy to “allow the government to exit its owner relationship.”
The company has been monetizing assets to repay the Fed. Benmosche said converting preferred shares held by the Treasury into common stock was one option to help the government exit that investment, although the details needed to be worked out.
The Treasury wasn’t immediately available for comment Thursday. The Treasury owns $49.1 billion in preferred shares, which means such a conversion would lead to dilution for existing shareholders.
“You might wind up paying a bit more for the stock if you wait,” said Peter Zuger, co-manager of Touchstone Mid Cap Value Fund. “But I’d probably like to have a better understanding of their capital-raising plans and whether those plans are going to be moderately dilutive or severely dilutive.”
Core Operations
Even beyond the vagaries of capital structure, the coast is not clear for Chartis and SunAmerica, which Benmosche sees as at the core of AIG.
In the life insurance segment, Benmosche said in the interview that AIG needed to boost distribution and improve variable annuity sales, which are down industry-wide.
Chartis faces a soft underwriting market but must avoid aggressive discounting.
“We are really concerned about some of the pricing that’s going on,” Benmosche said. “We are backing out of some of the markets that we have been in.”
AIG has been subject of allegations that it underpriced property and casualty risks to maintain market share — a criticism that the company strongly denies.
Only time will tell if AIG mispriced its risk as claims materialize in the coming years, Touchstone’s Zuger said.
“Assessing whether it’s a good investment at $38 a share right now is tough because it’s hard to know what the earning power is going to be three or four years from now,” Zuger said.