AIG - American International Group

[gokou3]

Well, another $950M from Metlife by end of August:

 

MetLife Release of $950 Million to AIG Moved Forward to Aug. 31

http://www.bloomberg.com/news/2012-08-02/metlife-release-of-950-million-to-aig-moved-forward-to-aug-31.html?cmpid=yhoo

 

[Grenville]

Trading in AIG has been halted on IB. 11:11am 8/3/12 west coast time

[BargainValueHunter]

Treasury announces public offering of AIG common stock; AIG intends to purchase up to $3B of common stock sold by Treasury. 

[fareastwarriors]

beautiful headline!

 

 

Treasury intends to $4.5b of AIG shares.  AIG says it will buy $3b.

 

http://www.bloomberg.com/news/2012-08-03/treasury-to-sell-4-5-billion-in-aig-stock-in-public-offering.html

[berkshiremystery]

A couple more of these offerings around the same depressed price and book value might further advance close to the $70 level. I only hope the stock goes nowhere in the next couple of qtrs.

[CONeal]

This still leaves them above 50% correct? 

 

Have been thinking a small one now and then the big one close to election if the Fed and Treasury allow them when they haopefully have the cash to make a big push.  Kinda funny how this hated piece of crap will play into the election.

[gokou3]

So assuming a sale price of $30.5 / share AIG will buy back about 5.5% of O/S, which in turn raises BVPS by 2.9% to $62.3.

 

Interesting that AIG is still up 1% as of now.  So the market doesn't feel share sales as a negative anymore?  Seems to me that AIG is intentionally putting out a mid-day announcement so they can base the trading prices of the day to set the prices for the share sale.

[berkshiremystery]

So assuming a sale price of $30.5 / share AIG will buy back about 5.5% of O/S, which in turn raises BVPS by 2.9% to $62.3.

 

Interesting that AIG is still up 1% as of now.  So the market doesn't feel share sales as a negative anymore?  Seems to me that AIG is intentionally putting out a mid-day announcement so they can base the trading prices of the day to set the prices for the share sale.

 

Well,... if the current price hovers around these levels, I personally estimate at the 2012 year end some BVPS of $70, and one year thereafter at 2013 year end something around $80, pretty much almost the same as in the Deutsche Bank research report.  Thus EPS should also advance faster. And if someone assumes only the same earnings on a lower equity base we get a higher ROE. So a 10% ROE should be achievable. On a current $31.5 stock price, this would imply some earnings yield of 25.4% for today's owners. So everybody should gawk at Berkowitz AIG warrant estimates for 2021,

+753% theoretical return (page 4 at Semi Annual Reprt). I personally think this number could be achievable, because BVPS should be by then way over $100.

 

http://www.fairholmefunds.com/sites/default/files/2012%20Semi-Annual%20Report%20Letter.pdf

 

[enoch01]

Demand increasing...

 

http://www.reuters.com/article/2012/08/03/aig-shares-idUSL2E8J3C9W20120803?feedType=RSS&feedName=marketsNews&rpc=43

 

However, sources close to the deal say AIG (whose major institutional shareholder is Bruce Berkowitz' Fairholme Capital Management) is finding more interest from traditional long-only investors after each share offering.

 

"The texture of the book is increasingly becoming more and more long-only involvement," one ECM banker said.

[rranjan]

Lock down period is only 30 days this time. I think we will see another purchase in next 30-60 days.

[berkshiremystery]

 

The Treasury on Friday revealed plans to sell US$4.5bn worth of its AIG common stock, comprising US$3bn worth of stock that will be repurchased by the company and US$1.5bn stock that will be sold to investors.

 

However, sources indicated the US$1.5bn component of the share sale had already been upsized to US$2bn. Including a planned "greenshoe" or overallotment option (15% of the total US$5bn), the total amount raised by Treasury could stretch to US$5.75bn.

 

It is understood the offering will be priced at US$30.50 a share, the same price as a similar offering in May and a relatively slim discount to AIG's closing price US$31.34 today. The figure is above the US government's break-even price most recently calculated at around US$29 a share.

[racemize]

30.50 price is confirmed. 

[gokou3]

 

The Treasury on Friday revealed plans to sell US$4.5bn worth of its AIG common stock, comprising US$3bn worth of stock that will be repurchased by the company and US$1.5bn stock that will be sold to investors.

 

However, sources indicated the US$1.5bn component of the share sale had already been upsized to US$2bn. Including a planned "greenshoe" or overallotment option (15% of the total US$5bn), the total amount raised by Treasury could stretch to US$5.75bn.

 

It is understood the offering will be priced at US$30.50 a share, the same price as a similar offering in May and a relatively slim discount to AIG's closing price US$31.34 today. The figure is above the US government's break-even price most recently calculated at around US$29 a share.

 

The stock even rose after hours.  Some of this heavy demand is likely attributed to arbitrageurs...

[berkshiremystery]

Lock down period is only 30 days this time. I think we will see another purchase in next 30-60 days.

 

Well, I assume two more sales until the end of the year of at least similar sizes, so we should be below the 50% government ownership level soon. Let's cheer the treasury, go Geithner go, go well below book.

[CONeal]

Once they are below 50% will they be regulated in how much they are allowed to buyback, like with the banks?  Due to this unknown I'd like them to take out a large chunk at one time that puts them under 50%.  Hopefully the next one is for 20% instead of 5 - 6%. 

 

If they have to submit paperwork like the banks it could take until March to get permission to buyback more.

[berkshiremystery]

Update: AIG Is Too Good A Long-Term Idea To Pass Up

 

"Many shall be restored that are now fallen, and many shall fall that are now in honor."

Horace's quotation from over 2,000 years ago could just as well have been made today in regards to American International Group Inc. (AIG)

 

On August 2nd AIG posted 2nd quarter net income of $2.33 billion or $1.33 per diluted share, up 27% YoY. After-tax operating income was $1.06 up 56% YoY, and book value grew to $60.58, up 32%. Book value excluding accumulated other comprehensive income was $56.07 on June 30, 2012, up 36% YoY. AIG under the leadership of Robert Benmosche has drastically improved its core business fundamentals, which should lead to sustained profitable growth moving forward.

 

http://seekingalpha.com/article/780351-update-aig-is-too-good-a-long-term-idea-to-pass-up?source=yahoo

[mankap]

I do not understand why treasury is selling $4.5B .AIG has got $7B from MLIII.Treasury could have sold stock worth $10B.

[nkp007]

From CEO Bob's interview yesterday, I could tell that AIG was ready to buy back shares but Treasury was slowing things down / being opaque.

[racemize]

perhaps the treasury wants to space it out in hopes of getting higher prices.  From their end, I might do the same thing, assuming I was trying to profit more than just get out.

[bargainman]

So let me ask the dumb question.. what are we missing that the market sees?  Why is this trading at 50% of book value? Is it just the bad news overhang?  Aren't there enough smart players out there to see this for the good investment that it might be?  Is it cause everyone is expecting the gov to dump their stock?  It just seems illogical that if they are really cleaning up the way they seem to be, and are buying back at 1/2 book value that they should trade at this price no?  Is Mr Market just being totally irrational?

[FCharlie]

 

So let me ask the dumb question.. what are we missing that the market sees?  Why is this trading at 50% of book value? Is it just the bad news overhang?  Aren't there enough smart players out there to see this for the good investment that it might be?  Is it cause everyone is expecting the gov to dump their stock?  It just seems illogical that if they are really cleaning up the way they seem to be, and are buying back at 1/2 book value that they should trade at this price no?  Is Mr Market just being totally irrational?

 

I ask myself that question about 50% of my portfolio.

 

I suppose we should ask ourselves, should AIG be valued on earnings or on book value?

 

Same thing applies to Bank of America. Should Bank of America sell for $20 because that's what book value is? Or should it sell for a single digit multiple of earnings?

 

I would simply enjoy the reality that AIG is able to, and hopefully soon, BAC will be able to repurchase huge amounts of stock well below book value.

[rranjan]

So let me ask the dumb question.. what are we missing that the market sees?  Why is this trading at 50% of book value? Is it just the bad news overhang?  Aren't there enough smart players out there to see this for the good investment that it might be?  Is it cause everyone is expecting the gov to dump their stock?  It just seems illogical that if they are really cleaning up the way they seem to be, and are buying back at 1/2 book value that they should trade at this price no?  Is Mr Market just being totally irrational?

 

You might be comfortable with a situation where value realization takes place anytime between 1-3 years but most individuals/institutions want to put money only if they think stock is going to go up during the next one or two quarter. They want quick results and also want some certainty about time frame. Even a time span of 1Q to 4Q might be too much uncertainty for some folks.

 

For AIG, I suspect it has to do with government controlling more than 50% shares and most people thinking that there is no hurry. When Gov ownership drops to 20-30% then it might become a non-issue but crowd thinks that it is not going to go up in near future. Another reason might be ROE being low right now. Anyway, I am very happy with low price. Hopefully, it will remain low for few more quarters.

 

 

[racemize]

So let me ask the dumb question.. what are we missing that the market sees?  Why is this trading at 50% of book value? Is it just the bad news overhang?  Aren't there enough smart players out there to see this for the good investment that it might be?  Is it cause everyone is expecting the gov to dump their stock?  It just seems illogical that if they are really cleaning up the way they seem to be, and are buying back at 1/2 book value that they should trade at this price no?  Is Mr Market just being totally irrational?

 

You might be comfortable with a situation where value realization takes place anytime between 1-3 years but most individuals/institutions want to put money only if they think stock is going to go up during the next one or two quarter. They want quick results and also want some certainty about time frame. Even a time span of 1Q to 4Q might be too much uncertainty for some folks.

 

For AIG, I suspect it has to do with government controlling more than 50% shares and most people thinking that there is no hurry. When Gov ownership drops to 20-30% then it might become a non-issue but crowd thinks that it is not going to go up in near future. Another reason might be ROE being low right now. Anyway, I am very happy with low price. Hopefully, it will remain low for few more quarters.

 

I think it is this, plus only paying attention to earnings.  They may even be right in the short term, but I'm willing to wait.

[mankap]

I think other  reasons for low price is the uncertainty arising from Fed oversight.Once treasury's ownership falls below 50% , Fed oversight will kick in.They will need Fed's approval for buyback and/or dividend.

[Guest hellsten]

So let me ask the dumb question.. what are we missing that the market sees?  Why is this trading at 50% of book value? Is it just the bad news overhang?  Aren't there enough smart players out there to see this for the good investment that it might be?  Is it cause everyone is expecting the gov to dump their stock?  It just seems illogical that if they are really cleaning up the way they seem to be, and are buying back at 1/2 book value that they should trade at this price no?  Is Mr Market just being totally irrational?

 

Two things come to mind that prevent AIG/BAC from rising:

 

1. Accounting

 

David Merkel's comment about AIG:

Value trap. Focus on sustainable ROEs that will validate book value. The accounting of AIG is a quagmire, even after their disposals.

http://alephblog.com/2012/07/30/on-life-insurance-and-life-reinsurance/

 

GMO's latest quarterly letter:

Once they have taken their losses it is a different matter, and it is possible that the financials are cheap today.  For our part, we are still somewhat leery of them since it is not entirely clear what other dangers still lurk on their balance sheets.

 

Not to mention the potential for further fines and litigation losses driven by shady practices before, during, and after the crisis.

http://www.gmo.com/websitecontent/GMOQ2Letter.pdf

 

2. Psychology and human behavior

 

For example, In "The Psychology of Bear Markets" James Montier writes:

The evidence above suggests that it is outright fear that drives people to ignore bargains when they are available in the market, if they have previously suffered a loss. The longer they find themselves in this position the worse their decision making appears to become.

 

He also writes:

The decision to invest or not should be a function of the current situation (from my perspective the value on offer) not governed by our prior experiences (or indeed our future hopes).

 

Some other James Montier quotes from "Financials: Opportunity or Value Trap?" that may be interesting:

One of the ways I tend to view banks valuation is using the ratio of market capitalization to deposits (effectively an unlveerd balance sheet). History teaches us that this ratio tends to bottom out between 3 and 4% (although banks will also trade on such measures before they go bust - witness Norhern Rock)

 

As the figure reveals, bargain basement valuations would mean somewhere between 0.5 and 0.75x book value. During the Great Depression, which was the last credit bust we witnessed in the west, the price to book of the financials fell from 2x to 0.5x.

 

Book value can also, and does, decline. Figure 28.7 shows that over the course of the Great Depression book value halved.