AIG - American International Group

[PlanMaestro]

There is a mention in a WSJ.com article of an online presentation (a video accompanying a 40-page slide show) being used to pitch the sale of shares but I cannot find it.

 

Has anyone seen it?

 

 

In its online presentation, AIG touts its position as a large global property and casualty insurer whose clients include a majority of America's and Europe's biggest companies, and details the profit record and growth potential of its domestic life insurance and retirement services business, SunAmerica Financial Group.

 

The presentation says the company has "compelling valuation at current [book value per share] of $43.49." Book value is a measure of a firm's assets minus its liabilities, and the net book value of AIG's operating businesses is $34.87 per share, according to the slide show.

 

The company also lists other "valuable financial assets," that are included in its book value, such as a 33% stake it holds in pan-Asian life insurer AIA Group Ltd. and the fair-market value of its interests in a vehicle that holds mortgage securities that AIG previously insured. AIG also has billions of dollars in deferred tax assets, which will help it save on taxes in the coming years.

 

Unlike many other large insurers, whose share prices are close to their book values, AIG's stock currently trades at a steep discount to its book value. Analysts have noted that AIG's return on equity, a measure of the company's profitability, is much lower than that of its peers.

 

AIG's presentation says the company plans to boost its return on equity to above 10% by 2015 from around 6% during 2010, and expects to achieve this by expanding its insurance business globally, improving investment income, redeploying billions of dollars in capital and cutting annual expenses significantly.

 

The presentation also notes that AIG has "de-risked" its balance sheet and unwound the bulk of its derivative contracts since the financial crisis, added to the reserves of its Chartis property and casualty-insurance unit and repaid its taxpayer debt ahead of schedule. Chartis's focus is now on achieving "higher growth in more profitable businesses," it states. AIG's goal is to increase overall earnings per share by midteen percentages on average through 2015.

 

http://webcache.googleusercontent.com/search?q=cache:ZKsrjS8pNpAJ:online.wsj.com/article/SB10001424052748703864204576319963478437984.html+AIG's+Pitch:+'Compelling'+Investment+Opportunity&cd=1&hl=es-419&ct=clnk&gl=mx&client=safari&source=www.google.com.mx

[txlaw]

There is a mention in a WSJ.com article of an online presentation (a video video accompanying a 40-page slide show) being used to pitch the sale of shares but I cannot find it.

 

Has anyone seen it?

 

I have been looking for it as well, but I can't find it.

[Rabbitisrich]

I haven't seen the video but the information cited by the article is all contained in the May 5 2011 earnings supplement. It goes over the detangling with the government, tax asset sources and expirations, AIGFP wind down, etc...

 

 

[Myth465]

Is AIG now a regular insurer (though quite large, and with many members saying the are underpricing) trading at a significant discount to book value. If so I can see why Bruce is excited. With it being that big the discount wont last forever. The trick is to avoid hiccups and to outlast the Government. We even have a floor, because the Gov isnt likely to sell at a lose.

 

If thats the rationale behind AIG then its simple enough and I could buy in. Any thoughts?

[prunes]

What do you guys think about the warrants? $45 strike price with an expiration of January 2021. Currently trade at $8.79.

[mevsemt]

I've been looking at these warrants (along with BAC warrants) and find them pretty compelling.  This might be overly simplistic, but if you assume they can grow book value at 8% per year AND the stock trades a 1x book at expiration you end up with a pretty solid return (and is much better then the return you would've gotten from the common).

[Sea Island]

Myth, Why wouldn't the government sell at a loss on its AIG position?

[hyten1]

just a thought, doesn't mean AIG is good or bad

 

we all know buffett/munger are expert at insurance company

 

what is bruce seeing that web/munger are not seeing at AIG? Buffett can easily buy AIG.

[PlanMaestro]

just a thought, doesn't mean AIG is good or bad

 

we all know buffett/munger are expert at insurance company

 

what is bruce seeing that web/munger are not seeing at AIG? Buffett can easily buy AIG.

 

Well, he recently sighed about an elephant that was too big for him without mentioning it  ;)

[beerbaron]

Well, he recently sighed about an elephant that was too big for him without mentioning it  ;)

 

Buffet is done with crappy insurers. He's trying to reduce risk by bringing other operations under the BRK umbrella, not increase it.

 

It would be fun to speculate on the whale Buffett was talking about tough!

 

BeerBaron

[finetrader]

http://www.theglobeandmail.com/globe-investor/investment-ideas/behind-the-numbers/dont-be-enticed-by-uncle-sams-aig-share-dump/article2030379/

 

 

[GaryCRibe]

I've been looking at these warrants (along with BAC warrants) and find them pretty compelling.  This might be overly simplistic, but if you assume they can grow book value at 8% per year AND the stock trades a 1x book at expiration you end up with a pretty solid return (and is much better then the return you would've gotten from the common).

 

I agree with this, i see in their recent K they think they can get to a 10% ROE by 2015.  If the warrants go out to 2021, BV at that time could be more than twice what it is today.  This, to me, is the essence of an asymetric bet. 

 

I've been looking at BAC as well, what do you think a reasonable ROE is for banks going forward?  I've read 11-13%.  If that's the case, the A's are reasonable, but don't seem as compelling on the same basis as the AIGs.  FWIW, i think this is something i'd build over time, to get a variety of prices, especially with the heavy government selling. 

[finetrader]

http://www.theglobeandmail.com/globe-investor/aig-prices-shares-at-29-each-source/article2033301/

[Packer16]

What types of expected returns are folks expecting with the warrants?  When I run the numbers on both AIG and BAC assuming a 7-8% growth and a 1x BV exit multiples I get 15 to 16% per annum.  This appears light when you can get the same FCF yield with growth from a MSFT or a higher yield from a SSW.  Am I missing something?  TIA

 

Packer

[ERICOPOLY]

What types of expected returns are folks expecting with the warrants?  When I run the numbers on both AIG and BAC assuming a 7-8% growth and a 1x BV exit multiples I get 15 to 16% per annum.  This appears light when you can get the same FCF yield with growth from a MSFT or a higher yield from a SSW.  Am I missing something?  TIA

 

Packer

 

Intuitively, I can't help but feel that the sharpest stock movements (the move in relative valuation) will happen over the first half of the life of the warrants.  Therefore, you know you can get the deep-in-the-money LEAPs now on BAC (for the same price of the warrants) with very little volatility premium, and then later when the warrants are deep-in-the-money (with far less volatility premium relative to today) you can move into them to squeeze the last few drops from the lemon.

 

It's true that the warrants don't miss out on the dividend, but there won't be any sizeable dividend from BAC until the problem at hand (the thing weighing on the stock), is cleared.  By that time you'll have doubled or tripled on the options, and you can then go to the warrants if that still floats your boat (I'll bet that if BAC doubled in two years and you cash out on the LEAPS, you'll find something better than going 2:1 leverage on BAC).

 

This strategy has some risk around the date of LEAPS expiration (temporary stock weakness), but for the same ultimate results I believe you can put a lot less money at risk in the first place (because this strategy is likely to beat the one of holding the warrants today, IMO).

 

Just me, but once the stock has doubled the idea of being levered 2:1 into a "fairly" priced stock would gnaw on me, which is where I would be if I went for the warrants.  Also, if you'd be finding yourself selling the warrants when levered 2:1 against a fairly priced stock, how much better will your returns be versus just buying the common today?  I think for most of you holding fairly priced stocks with leverage is not your style.

 

Put differently, if you think you could hang on with 2:1 leverage position AFTER the stock has doubled, why shouldn't you do that right now before it has doubled?

 

[valuecfa]

Helps to factor in that AIG has over $25 Billion in deferred tax assets that are not even included into book value. Granted, about $9 billion expires over the next 5 years, but the rest will be around for between 10 and 20 years.

 

Not paying taxes for a decade or more is a nice competitive advantage. And it will get you an unusually high ROE for some time, or at least until they add the allowance (or some of it) back to book.

[Packer16]

I have read the Davis Dynasty but I think this may be a different animal.  Davis made money by buying small insurance cos below tangible book and had both the book value and discount disappear.    If BV grows by 7%, you get $90 plus possibly the $14 if they can use the NOL as planned you get $90 to $104.  As to multiple, I think 1x is reasonable a premium but if you use 1.25x TBV you get $100 to $118.  So the range for the warrant is from $45 to $73.  On a $9.19 purchase price the IRR for 10 years is 17% to 23%.  With MSFT yielding around 15% with growth and SSW in the low 20% with growth, why go for 17% to 23% with many things that can go wrong?  For example, how do you get comfortable with a LT BV growth rate of 7 to 8%?  If goes down to 4-5% the IRR declines to 11% to 17%.

 

Packer    

[Myth465]

I dont know about projecting growth for AIG into the future. Insurance is a tricky beast, who knows what could happen when. A few large cats in the wrong periods really screw up calculations. Look at FFH over the lean 7 years. I would just buy leaps to try to capture the discount to book today, without projecting much into the future.

 

I have already punted on AIG though. Insurance seems to be taking it on the chin this year, and this one just doesnt sit right with me...

[prunes]

Fairholme's most recent buys were in December in the $40s. Given that Bruce isn't buying at these current levels (he's a 10% owner so we don't need to wait for a 13F filing to find out), should we take that to mean that he's contemplating exiting his portfolio because he made a mistake? If he truly had faith in his decision, now would be the time to buy.

[txlaw]

Fairholme's most recent buys were in December in the $40s. Given that Bruce isn't buying at these current levels (he's a 10% owner so we don't need to wait for a 13F filing to find out), should we take that to mean that he's contemplating exiting his portfolio because he made a mistake? If he truly had faith in his decision, now would be the time to buy.

 

Keep in mind that Berkowitz also got warrants from his buys in December.  Since the warrants are trading at around $9, his cost basis was more like the low $30s for his highest price buys of AIG common.

 

I really doubt he will exit.  He may even add more to his position, but he has plenty of time to do so because the market likely will not recognize whatever value is there for a while. 

 

[txlaw]

Fairholme's most recent buys were in December in the $40s. Given that Bruce isn't buying at these current levels (he's a 10% owner so we don't need to wait for a 13F filing to find out), should we take that to mean that he's contemplating exiting his portfolio because he made a mistake? If he truly had faith in his decision, now would be the time to buy.

 

Keep in mind that Berkowitz also got warrants from his buys in December.  Since the warrants are trading at around $9, his cost basis was more like the low $30s for his highest price buys of AIG common.

 

I really doubt he will exit.  He may even add more to his position, but he has plenty of time to do so because the market likely will not recognize whatever value is there for a while. 

 

 

I made a mistake in my previous post.  For each share of AIG common, Fairholme received 1/2 a warrant.  So mid to high $30s cost basis for the highest price buys. 

 

How come no corrections?  Usually, people are pretty good about jumping on errors.

 

 

[GaryCRibe]

could you run through your assumption of 7% growth and an exit at book value when it trades at 65% of book now? How do your numbers work? Have you factored in the dividend protection?

 

why do you assume a 1x book exit when good insurance companies often trade at a premium to book, sometime 2 x book? do you know what msft will look like in 2021?

 

here's another assumption. bv today is $46. It grows at 8% for 10 years ending at $102. Stock trades at 1.25 book in ten years at $127. warrants would trade at $82 providing annual return of 24.7%. This does not factor in dividend protection which seems excellent. The reason  I like a lot of these warrants are that you can produce "venture capital" sized returns by investing in relatively safe and predictable basic vanilla financials over long periods of time. I believe it would be helpful for people to go back and review how the Davis "Dynasty" was built.

 

I ran the numbers on this, and I think its quite compelling.  Check it out, I put a sensitivity on ROE and BV multiple.  Pretty good points made about def'd tax assets as well. 

Year End 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Year 0 1 2 3 4 5 6 7 8 9 10 ROE 7% 8% 9% 10% 10% 10% 10% 10% 10% 10% 10% Payout Ratio 0% 0% 0% 10% 20% 20% 20% 20% 20% 20% 20% Growth in BV 6.75% 8.00% 9.00% 8.55% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% YE BV/Sh $50.17 $54.19 $59.06 $64.11 $69.24 $74.78 $80.76 $87.22 $94.20 $101.74 $109.88 Earnings Power $3.17 $4.01 $4.88 $5.05 $5.13 $5.54 $5.98 $6.46 $6.98 $7.54 $8.14 D/S $-  $-  $0.50 $1.03 $1.11 $1.20 $1.29 $1.40 $1.51 $1.63 Div Adj (if >$.67/sh) $-  $-  $-  $-  $0.36 $0.44 $0.53 $0.62 $0.73 $0.84 $0.96 Warrant Strike $45.00 $45.00 $45.00 $45.00 $44.64 $44.21 $43.68 $43.06 $42.33 $41.49 $40.54 BV Multiple 56% 80% 90% 100% 100% 100% 100% 100% 100% 100% 100% PPS $28.30 $43.35 $53.16 $64.11 $69.24 $74.78 $80.76 $87.22 $94.20 $101.74 $109.88 Payoff $(8.70) 0 0 0 0 0 0 0 0 0 $69.34 IRR 23.07% Price/Tang. Book Return on Equity Price/Tang. Book Return on Equity 23.07% 8% 9% 10% 11% 12% $69.34 8% 9% 10% 11% 12% 80% 15.41% 16.99% 18.47% 19.85% 21.15% 80% $36.47 $41.79 $47.37 $53.19 $59.28 90% 18.21% 19.63% 20.96% 22.23% 23.44% 90% $46.36 $52.22 $58.35 $64.76 $71.46 100% 20.52% 21.83% 23.07% 24.26% 25.40% 100% $56.26 $62.65 $69.34 $76.33 $83.64 110% 22.49% 23.72% 24.89% 26.02% 27.11% 110% $66.16 $73.09 $80.33 $87.90 $95.82 120% 24.21% 25.38% 26.50% 27.59% 28.64% 120% $76.06 $83.52 $91.32 $99.47 $108.00 130% 25.74% 26.86% 27.95% 29.00% 30.03% 130% $85.95 $93.95 $102.30 $111.04 $120.18

 

 

 

 

 

 

[GaryCRibe]

The other thing that I like is that you have an indiscriminant large seller in the market place.  In order for this one to work, I don't need to assume anything crazy, I just have to think some really good assets can return to industry average profitability over a 10 year period of time.  With the government unwinding, anyone who's interested should get plenty of time to build the position. 

[vinod1]

1. Current book value of $49 per share. We also have $13 per share of Deferred Tax Assets. Just taking the current book value at face value using Berkowitz's thesis of intense regulatory scrutiny as a result of bailout, AIG currently sells at 1/2 of book value. Any reserve deficiencies should be more than offset by the deferred tax assets (although not carried on books).

 

2. CEO's sworn testimony to congressional panel stating $6 billion to $8 billion normalized operating earnings or about $3-4 per share. I think we can take this a little more seriously than the regular investor presentations.

 

3. AIG has an aspirational goal of about $4-$5B of incremental pre-tax operating income by 2015 compared to its normalized pre-tax income for 2010.

 

Thoughts?

 

Vinod

 

[ERICOPOLY]

I have read the Davis Dynasty but I think this may be a different animal.  Davis made money by buying small insurance cos below tangible book and had both the book value and discount disappear.  

Packer    

 

The book claimed that Davis used the "maximum" amount of margin.  Is the book right about that?  If so he was perhaps just lucky to not get the right market that would force a liquidation.