AIG - American International Group

[fareastwarriors]

http://www.bloomberg.com/news/2013-05-03/aig-bets-on-apartments-as-benmosche-sees-shift-to-rentals.html

 

 

AIG Bets on Apartments as Benmosche Sees Shift to Rentals

 

[Uccmal]

The warrants are getting a little ahead of themselves right now. 

 

Stock price of 44 + 19 (warrant cost) = 63 to break even.  Before everyone jumps all over me, yes I know there is 7 years of time value in there, and prospective dividends to bring the strike down. 

 

However, They are beginning to reflect a price above book value that could possibly never materialize as the time value erodes.  Since Black Scholes is useless in this case they are hard to value, even though I suspect this is how the algorithms are getting the prices. 

[Hielko]

Long term warrants aren't valued using Black&Scholes, in fact: even short term options are not valued using B&S. B&S is mainly used to communicate prices expressed in terms of volatility because that's the only unknown in a simple model that everybody knows. The valuation of options is done with more complex models that for example account for tail risk because outcomes are not normally distributed or for upward drift in the underlying of long term options.

[Packer16]

I think the question with the warrants is how fast will BV grow as appreciation is dependent upon growth.  If BV grows by 10% per year and price increases to 1x BV then you get a 5x returns over 7 years or 23% annualized versus 16% annualized for the stock.  Not quite the leverage as at lower prices but still pretty good.

 

Packer

[sswan11]

Anybody selling warrants or options into this rally (not that I am :)...

[zippy1]

Anybody selling warrants or options into this rally (not that I am :)...

The option vs. stock cross over point is now $78, I think. In mid-March, it was about $72.  So I guess the question is how confident we are for the stock price to go above $78 in Jan 2021 based on tpday's best estimated fundamentals of AIG.

[Packer16]

If AIG grows BV by 10% per year it should be be $140 by the time the warrants expire.  So do you think the P/BV will be greater than 0.56 in 2021?

 

Packer

[Uccmal]

Long term warrants aren't valued using Black&Scholes, in fact: even short term options are not valued using B&S. B&S is mainly used to communicate prices expressed in terms of volatility because that's the only unknown in a simple model that everybody knows. The valuation of options is done with more complex models that for example account for tail risk because outcomes are not normally distributed or for upward drift in the underlying of long term options.

 

What about computer trading programs?  I am Curious.  When I buy options I see myself bidding in what is mostly an automated process. 

 

If AIG grows BV by 10% per year it should be be $140 by the time the warrants expire.  So do you think the P/BV will be greater than 0.56 in 2021?

 

Packer

 

Who on earth has any idea?  I sure dont. 

 

 

I have sold some warrants and Leaps into the rally.  Normal procedure for me as things return to value.  Its inevitable that there will be some kind of correction sooner or later, and I want some cash available.  I have been selling BAC leaps into the rally as well.  Again, normal procedure.  I am not trying to time the market, just being very, very cautious right now. 

[Packer16]

My point about the warrants is that their value is now dependent upon future BV growth not the valuation returning to normal.  If you don't think the growth will be there then this is the time to sell.  However, if you think the growth will occur then the warrants still provide some upside.  Of course the upside will be greater if we have a downturn (of which I don't know when or will occur).

 

Packer

[Liberty]

My point about the warrants is that their value is now dependent upon future BV growth not the valuation returning to normal.

 

But as long as valuation isn't back to normal, buybacks provide a pretty easy road to bvps growth, so that's not as bad as it might first seem.

[plato1976]

Agree

 

The key is still how fast it can go back to the normal earning power and stay there

 

My point about the warrants is that their value is now dependent upon future BV growth not the valuation returning to normal.

 

But as long as valuation isn't back to normal, buybacks provide a pretty easy road to bvps growth, so that's not as bad as it might first seem.

[deadspace]

FOr all of you calculating book value growth based on the present $60 to achieve a future price please check this out --- The ROE goals may be much lower than we were assuming

 

 

Return on Equity Goal

 

Gregory Locraft – Morgan Stanley: Just wanted to clarify the ROE goal. It’s not inclusive of FAS 115 and the DTA. Is that correct from a book value perspective?

 

David Herzog – EVP & CFO, AIG: That’s correct.

 

Gregory Locraft – Morgan Stanley: So, just to be clear, you take current stated book value of $67 subtract $20 a share and so we’re really at a $47 book value number and then we sort of grow off of that and we want to earn a 10 ROE against it?

 

David Herzog – EVP & CFO, AIG: I’m not quite sure I follow your math; maybe we could do that offline. I think that’s probably the best way to handle that.

 

Gregory Locraft – Morgan Stanley: It’s just FAS 115 and DTA subtracted from current GAAP book value. So the goal is 10 ROE ex-FAS 115, ex DTA in 2015. Then the other is just on the capital deployment side, you mentioned $25 billion to $30 billion. Can you update us on how much you have left to do to get to that goal, like how much is being completed and how much more can you do to meet that?

[prevalou]

If the ROE is based on 47$ book value, earnings are then after tax ,even if AIG doesn't pay taxes. So the cash earnings are far better than 10% on 47 $ book value.

[zippy1]

If AIG grows BV by 10% per year it should be be $140 by the time the warrants expire.  So do you think the P/BV will be greater than 0.56 in 2021?

 

Packer

Well put, Packer! That is why it is my biggest position.  ;)

[Packer16]

If you look at the Q1 2013 presentation materials RoE is defined as income divided by BV less AOCI or about $59 per share.  However, AIG is already at 9% RoE on this metric so I think the 10% number is on BV including AOCI as there is continued improvement in operations.  Even if the BV growth is calculated using 10% of BV less AOCI you get a 9% BV growth or a $130 BV and a 1x multiple gets you a $130 stock price at warrant expiration

 

Packer

[mankap]

Packer- Are you assuming that no dividend is paid.

My assumption is that they will pay 40% of earning as dividend.

That will leave 60% of earning contributing to increase in book.

Compounding book at 6% ,gives me a book of $100 at the warrant expiry.

[Packer16]

Yes I am to simplify the analysis.  The result for the warrants would probably be better if they paid a dividend as both the strike price declines and more shares are issued.

 

Packer

[berkshiremystery]

I don't occupy my mind much, what will be with AIG in next day, week, or month. Looking forward to harvest my position very far away after 2020 something... and my bold prediction -- they will have

beaten Berkshire's share price growth, specially for investors that hold a non-recourse leveraged

position through a mixture of common, warrants and leaps. And if somebody would ask me why this should happen ?  I would say, because they are currently still considered an ugly duckling in most American minds, the number 1 hated company,...  and their share price comes and grows from way, way below current and specially future book value.

 

AIG - The New Darling

2013-05-06

http://seekingalpha.com/article/1404381-aig-the-new-darling?source=yahoo

 

 

 

AIG - America's Comeback Story Is Just Getting Started

2013-05-05

http://seekingalpha.com/article/1403001-aig-america-s-comeback-story-is-just-getting-started?source=yahoo

 

[mrvlad0]

American International Group Inc.'s ( AIG ) big property-casualty unit earned an upgrade Monday from Standard & Poor's Ratings Services, the first improvement in the closely watched measure for the division since the company nearly collapsed in 2008.

S&P bumped the long-term counterparty credit rating and financial-strength rating of the AIG PC Group, until recently known as Chartis Group, to A-plus from A. It cited "the successful restructuring that the AIG has undertaken during the past two years' and has made "significant investments" in the unit to improve its operations. The A-plus rating is S&P's fifth highest.

 

http://www.nasdaq.com/article/aig-property-casualty-unit-upgraded-by-sp-20130506-01000

[PlanMaestro]

http://www.nasdaq.com/article/judge-aig-has-right-to-sue-bofa-over-maiden-lane-ii-mortgages-20130507-00873

[MYDemaray]

In case anyone cares, here are some slides from Whitney Tilson on AIG:

http://www.businessinsider.com/whitney-tilson-vic-vegas-presentation-2013-5#-8

 

There also is some whitepaper floating around the hedgies pitching AIG as a "demutualization".  I think that's marketing spin, but looks like Tilson picked up on it since he uses the term.

[Liberty]

In case anyone cares, here are some slides from Whitney Tilson on AIG:

http://www.businessinsider.com/whitney-tilson-vic-vegas-presentation-2013-5#-8

 

There also is some whitepaper floating around the hedgies pitching AIG as a "demutualization".  I think that's marketing spin, but looks like Tilson picked up on it since he uses the term.

 

Slide 14 is interesting, I had not thought of it quite like that. Hopefully it's true that there are all kinds of good surprises that will come from reserves.

[no_free_lunch]

I'm pretty sure the demutualization whitepaper was posted earlier on this board. 

[returnonmycapital]

Apart from common, I hold a decent chunk of AIG warrants.

 

The thinking, just like with BAC, is that the business is worth at least book value. I buy the warrants when the common + warrant price is trading substantially beneath book. I sell the warrants when the common + warrrant price = book value per share. I keep the common for the earnings power. This is my way of buying options while avoiding time value speculation.

 

In the BAC case, the warrants generated more than twice the common return. In AIG's case, the warrants haven't even kept up with the common, despite almost 8 years left on the warrant and a premium over common of only 40%, or about 5% of required return on the common per year to counter-act the time value decay in the premium price. I wonder why.

 

Anyone else notice this?

[Olmsted]

Slide 14 is interesting, I had not thought of it quite like that. Hopefully it's true that there are all kinds of good surprises that will come from reserves.

 

Here's the notable excerpt from Tilson:

 

Thus, in recent years AIG's management has been incentivized to depress earnings and keep the stock price low so: a) the government could be bought out at a low price; and b) management's options would be struck at a low price

 

I can't prove it, but I suspect AIG has been sandbagging reported earnings by over-reserving, paying claims extra fast, and taking their time returning capital to shareholders.

 

I believe he's made that argument before. How much leeway does management actually have to intentionally depress earnings like that?  It seems that any "conspiracy" to depress earnings that was big enough to matter would get leaked, and AIG would get skewered for it. 

 

However, I hope he's right!