AIG - American International Group

[FrankArabia]

I'm also investigating this whole AIG thing so if I'm wrong please advise. I believe AIGFP is classified under Financial services in 2007. Their earnings prior to the crisis is (from 2007 AR)

 

Financial Services operating income (loss), excluding net realized

capital gains (losses)

2007 - (8,983)

2006 - 2,338

2005 - 2,256

2004 - 2,298

2003- 2,189

[MrB]

Does the anti-dilution provision apply for share repurchases, or only for dividends in excess of the threshold? I can't find the AIG warrant prospectus on EDGAR, but in the BAC prospectus it says:

 

http://www.sec.gov/Archives/edgar/data/5272/000095012311003847/y89089e424b2.htm

 

Thanks MrB. So if I read correctly, the repurchase anti-dilution provision only applies to tender offers, and those only when the they repurchase 30% of the shares oustanding. Am I right about that?

That is also my understanding.

[berkshiremystery]

Our board member Norman wrote some new article about AIG for the Globe & Mail.

 

Unloved AIG's high-flying potential favours the patient investor

Sept. 18th, 2012 - The Globe & Mail

By Norman Rothery

 

http://www.theglobeandmail.com/globe-investor/investment-ideas/strategy-lab/value-investing/unloved-aigs-high-flying-potential-favours-the-patient-investor/article4552235/

[berkshiremystery]

 

 

Court allows Greenberg suit to proceed over AIG bailout

Sept. 18, 2912

http://in.reuters.com/article/2012/09/18/usa-fed-aig-idINL1E8KI7TB20120918

[returnonmycapital]

AIG Bailout Saga: All's Well That Ends Well

Sep. 13th, 2012 - SeekingAlpha.com

http://seekingalpha.com/article/865881-aig-bailout-saga-all-s-well-that-ends-well?source=yahoo

 

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AIG: Take Advantage Of AIG's Buyback For 50% Discount To Book Value

Sep. 11th, 2012 - SeekingAlpha.com

http://seekingalpha.com/article/859121-aig-take-advantage-of-aig-s-buyback-for-50-discount-to-book-value

 

http://static.cdn-seekingalpha.com/uploads/2012/9/1335191_13473267806562_rId12.png

Source: http://static.cdn-seekingalpha.com/uploads/2012/9/1335191_13473267806562_rId12.png

 

AIG Estimated Book Value per Share  (3rd qtr. 2012)  $66.12

 

A price to book of about 0.5 looks increasingly laughable:

 

1) Combined ratio on the whole insurance business (including life) is running at 108%, meaning their cost of float is 3% at present (2009 combined ratio was 120% with a cost of float of about 10%)

2) Shares outstanding probably down about 22% in the 9 months to Sept 30

3) ROE of 8% (using comprehensive earnings) for the first 6 months of 2012 alone

4) Operating margin of over 20% for first 6 months of 2012

5) Net investments/share (after deduction of debt & related liabilities) of over $200 at June 30, up from $165 at December 31, 2011

 

Maybe Benmosche is serious.

[FrankArabia]

if your combined ratio was 109% than your cost of float is 9%. how did you get 3%? can you please fill me in?

[returnonmycapital]

if your combined ratio was 109% than your cost of float is 9%. how did you get 3%? can you please fill me in?

 

Cost of float = Underwriting profit (loss) / float

 

108.6% combined ratio, or -8.6% underwriting result * $19,080*2 (annualized premiums earned) = -$3,282

 

-$3,282 / $96,610 (estimated float) = 3.4% cost of float

[FrankArabia]

thanks for the clarification. got confused there for a sec.

[berkshiremystery]

Insurers Pressued to Hit 10% Return on Equity, Walsh Says

Sep. 19, 2012

 

http://www.bloomberg.com/news/2012-09-19/insurers-will-struggle-to-post-10-return-on-equity-walsh-says.html?cmpid=yhoo

 

 

Lower bond yields have “imposed somewhat of a discipline” on companies in managing their insurance liabilities, Walsh said. New York-based AIG spent $1.09 on claims and expenses for every premium dollar at its Chartis property and casualty operation in 2011, better than $1.17 a year earlier. The figure improved to $1.02 in the second quarter.

Chartis is targeting return on equity of 10 percent to 12 percent in 2015 compared with a “normalized” return of 6 percent in 2010, Peter Hancock, the unit’s chief executive officer, said in May.

[FrankArabia]

i went over the financials again last night....i'm going to take a small piece in this.

[berkshiremystery]

i went over the financials again last night....i'm going to take a small piece in this.

 

Just read my old post,... --->>

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/aig-american-international-group/msg82328/#msg82328

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/aig-american-international-group/msg72998/#msg72998

 

I personally should add now, that I assume that AIG's book value might reach at least the 100-150 range at the end of the decade,... if the current stock price stays low for some longer time frame, they are able to archive some outstanding above average EPS & ROE growth rates, just by buying back shares,... same as Buffett's IBM thesis. Therefore I own a shitload of common/&warrants to leverage up the returns.

[FrankArabia]

I am no insurance expert (though I have dabbled in insurance companies before) but AIG doesn't appear to be anywhere near the top of the pile in terms of quality. However, the valuation is what attracts me plus the fact I see they're headed in the right direction. Can they earn a 10% ROE? looks like they might edge closer to 5-8% adjusted for non core items but with TBV at 0.6x, its still a bargain.

 

I just don't feel comfortable until i get through 400 pages of the 10-k and know the basic in and outs. Insurance is definitely one of those areas where you can't leave out too many details and AIG has a terribly difficult history (though I think for the most part a lot of it can be ignored?).

[bmichaud]

I'm surprised at the volume on AIG since the recent IPO - is there any way the govt could be exiting on its own already?

[berkshiremystery]

I'm surprised at the volume on AIG since the recent IPO - is there any way the govt could be exiting on its own already?

 

Yup,... thanks for pointing it out,... seems it has doubled in the last 2 weeks.

http://finance.yahoo.com/q/hp?s=AIG+Historical+Prices

 

But I guess the govt would only sell them in public announcements. So the increased volume should be the result of the increased public float available to the market.

 

[berkshiremystery]

Here's some interesting article comparing the AIG common vs the TARP warrants. I personally think also they might have some tremendous value if they mature.

 

 

Berkowitz Owns 1/3 Of AIG's TARP Warrants, And He Can't Get Out

June 19, 2012  - SeekingAlpha.com

 

http://seekingalpha.com/article/668281-berkowitz-owns-1-3-of-aig-s-tarp-warrants-and-he-can-t-get-out

 

Berkowitz and his investment in AIG have been chronicled across all forms of media, but not much has been written about his investment in the AIG warrants. In my last article on AIG, I pointed out a pathway for the warrants to become a 10 bagger in 7 years. In the comment section, one of the posters pointed out that Berkowitz owns 1/3 of all the outstanding warrants. I knew he had a large position, but owning such a large percentage of the float introduces some new dynamics that should be studied.

 

-----

 

Berkowitz's total investment in AIG is about $3 billion, which constitutes close to 35% of his total portfolio. Has Berkowitz lost his mind? Never before have I seen a large mutual fund manager have such a concentrated position. Berkowitz is betting his whole career on AIG, so I assume he knows an enormous amount about the company. If he knew of any major holes, I suspect his position would not be anywhere as large.

 

-----

 

What's His Game Plan With the Warrants?

 

As you can see from above, he owns almost 1/3 of the warrants outstanding. That means the free float of the warrants at today's price of $10.5 is around $530 million. This is a pretty tight float, which I think may have become even tighter since Berkowitz's last filing on March 31. With the tiny volumes in AIG warrants traded on a daily basis, it is clear that Berkowitz cannot efficiently exit his warrant position. In my opinion, it looks like he will hold these all the way to expiration. This position he will most likely keep for the long-term, while he will most likely sell down the common stock, as it gets closer to fair value.

 

Free Float of Warrants Tight

 

With the free float of the warrants shrinking, I think there is significant potential for the warrant price to increase rapidly. The small float is an advantage for retail investors. Small investors can easily sell their position on price spikes, while Berkowitz is stuck. In the long-term, however, the best position is probably to be stuck with Berkowitz. Then, like him, you will be forced into a 10-bagger.

 

 

If AIG common doubles to $70 in the next years, you would make 100% on those common shares, but the warrant alone will have some intrinsic value of $25 alone,... plus the time value for the remaining years, probably some more $25, or a total of $50. Just some rough guesstimate. I don't even want to bother my lazy brain of what might they be worth if they mature and AIG book value has doubled, and the actual common price is slightly above.

 

[bmichaud]

I'm surprised at the volume on AIG since the recent IPO - is there any way the govt could be exiting on its own already?

 

Yup,... thanks for pointing it out,... seems it has doubled in the last 2 weeks.

http://finance.yahoo.com/q/hp?s=AIG+Historical+Prices

 

But I guess the govt would only sell them in public announcements. So the increased volume should be the result of the increased public float available to the market.

 

Good point! Lot of extra float for the market to absorb. I wish the Company was being more aggressive here taking advantage of the high volume/low price - unfathomable why they would even consider a dividend at these levels....

[berkshiremystery]

How American International Group Becomes A 5-Bagger In 7 Years

June 14, 2012 - SeekngAlpha.com

 

http://seekingalpha.com/article/660781-how-american-international-group-becomes-a-5-bagger-in-7-years

 

Then if we look at earnings, and assume a 10% compounding return on book value, the book value per share would double in 7 years taking the stock to $150-$170/share. That is how AIG stock becomes a 5-bagger, with upside if the stock trades above book.

 

The 5-bagger scenario is highly dependent of some major assumptions. AIG may not be able to grow book value at a compounded rate of 10% per annum. The company may also not be able to buy back shares at such a discount to book value. There is also a chance that the stock does not trade at book value for over 7 years. Even if you ratchet down these assumptions, you can still make good gains in the stock at today's prices. The beauty of it is: the longer the stock stays down, the more accretive the buybacks will be. It the stock pops you make money in the short term. If the stock stays down, there are greater chances for significant increases in book value leading to outsized gains in the long term.

 

 

[cayale]

I am no insurance expert (though I have dabbled in insurance companies before) but AIG doesn't appear to be anywhere near the top of the pile in terms of quality. However, the valuation is what attracts me plus the fact I see they're headed in the right direction. Can they earn a 10% ROE? looks like they might edge closer to 5-8% adjusted for non core items but with TBV at 0.6x, its still a bargain.

 

I just don't feel comfortable until i get through 400 pages of the 10-k and know the basic in and outs. Insurance is definitely one of those areas where you can't leave out too many details and AIG has a terribly difficult history (though I think for the most part a lot of it can be ignored?).

 

I'd agree.  This is the main risk, right?  Their underwriting history does not, to me, indicate what management promises for the future.  But management is, by and large, a new regime.

 

Almost (but not quite) all of the other hazardous stuff is gone.  It comes down to product lines, underwriting discipline and investment returns.  On these fronts, management has stated that they have exited many of the long-tail lines that caused underwriting losses and that they are working toward allocating capital to more profitable lines.  AIG's biggest product line is D&O, so it probably pays to understand that.  I have read a few transcripts that are great discussions of the added terms and exclusions that underwriters are requiring on that front.

 

Management is certainly talking the talk on underwriting discipline, both on the Chartis and SunAmerica sides.  It is promising but time will tell whether they are walking the walk. 

 

As far investment returns, they are going to be modest in a ZIRP environment.  If they don't get their loss and cost ratios down, they won't get ROE's up.  It is also not clear to me how much "risk" they are going to take in trying to achieve investment returns.  I guess one can always goose ROEs by buying back stock at cheap prices.

 

I have taken a 1/2 position, but with financial stocks it is sometimes the cheapest-looking that end up being the most expensive.  Tempering that sentiment is what appears to me to be a management team that has really moved mountains and said and done the right things in a very short period of time.  But that was the extraneous.  Now we see what kind of operators they are.

 

The other interesting thing in this space is the number of life insurers that are trading at huge discounts to book value.  If you are only looking at AIG on a relative value basis, I don't think you can assume 1x book is the current baseline valuation for the life portion of the company.  That said, I like the way AIG, at least on the surface, approaches this business.

 

[FrankArabia]

You must be referring to Hartford and Metlife (at least the big caps I have been looking at).

 

Two things, those businesses haven't undergone the major restructuring like AIG so future prospects may resemble the past a bit more though my assertion is speculative.

 

Metlife is not selling for as cheap on a TBV basis but Hartford is.

 

Hartford is selling for significantly cheaper but I believe Hartford was undergoing more problems on the VA side and still faces potential losses from that hence the discount.

 

More research to follow.

 

 

[Uccmal]

Cayale,  I hear you about the life insurers.  Sun America HAD less exposure to variable annuities, than Manulife, for example.  MFC walked into this protracted low interest rate environment with alot of exposure.  Now Sun America has moved into this business providing the same product, but with lower assumed returns for their life policies, than MFC gauranteed.  Life insurance is a tough business in this environment. 

 

Its a good thing Chartis is a much larger company in the AIG fold.

 

At this point, all I am looking for is a return to value.  $70.00 would nearly triple the value of my warrants, and the Leaps I hold would multiply in value.  60.00 would be good as well.  So would $50 within a year or so, which is not farfetched at all.

 

 

[mysticdrew]

I'm surprised at the volume on AIG since the recent IPO - is there any way the govt could be exiting on its own already?

 

Yup,... thanks for pointing it out,... seems it has doubled in the last 2 weeks.

http://finance.yahoo.com/q/hp?s=AIG+Historical+Prices

 

But I guess the govt would only sell them in public announcements. So the increased volume should be the result of the increased public float available to the market.

 

I thought the latest articles mentioned that the govt was likely to sell the remaining in the open market instead of an offering

[finetrader]

Cayale,  I hear you about the life insurers.  Sun America HAD less exposure to variable annuities, than Manulife, for example.  MFC walked into this protracted low interest rate environment with alot of exposure.  Now Sun America has moved into this business providing the same product, but with lower assumed returns for their life policies, than MFC gauranteed.  Life insurance is a tough business in this environment.

 

There is also a difference in accounting for CAN company that are required to adopt IFRS accounting, vs US companies that use US GAAP. IFRS use a lot more of mark to market. As an exemple, Manulife said that for their latest quarter results, they had a 300M$ loss, while saying that would they used US GAAP, they'd be posting a 2.2B$ profit.

Something to consider.

 

from Manulife second quarter press release:

^{Net income in accordance with U.S. GAAP4 for the second quarter was $2.2 billion, or $2.5 billion higher than our results under the Canadian version of IFRS5 and total equity in accordance with U.S. GAAP4 was $16.6 billion higher than under IFRS. The primary driver of the quarter's higher U.S. GAAP earnings compared to IFRS earnings relates to variable annuity accounting differences.}

[Uccmal]

Cayale,  I hear you about the life insurers.  Sun America HAD less exposure to variable annuities, than Manulife, for example.  MFC walked into this protracted low interest rate environment with alot of exposure.  Now Sun America has moved into this business providing the same product, but with lower assumed returns for their life policies, than MFC gauranteed.  Life insurance is a tough business in this environment.

 

There is also a difference in accounting for CAN company that are required to adopt IFRS accounting, vs US companies that use US GAAP. IFRS use a lot more of mark to market. As an exemple, Manulife said that for their latest quarter results, they had a 300M$ loss, while saying that would they used US GAAP, they'd be posting a 2.2B$ profit.

Something to consider.

 

from Manulife second quarter press release:

^{Net income in accordance with U.S. GAAP4 for the second quarter was $2.2 billion, or $2.5 billion higher than our results under the Canadian version of IFRS5 and total equity in accordance with U.S. GAAP4 was $16.6 billion higher than under IFRS. The primary driver of the quarter's higher U.S. GAAP earnings compared to IFRS earnings relates to variable annuity accounting differences.}

 

Thanks finetrader.  Hadn't looked at it recently.  I was thinking to the effects two years ago, when they were panic hedging, against lower rates.  For a comparison MFC is trading at 0.8-0.9 BV depending on accounting used.

[gokou3]

I'm surprised at the volume on AIG since the recent IPO - is there any way the govt could be exiting on its own already?

 

Yup,... thanks for pointing it out,... seems it has doubled in the last 2 weeks.

http://finance.yahoo.com/q/hp?s=AIG+Historical+Prices

 

But I guess the govt would only sell them in public announcements. So the increased volume should be the result of the increased public float available to the market.

 

I thought the latest articles mentioned that the govt was likely to sell the remaining in the open market instead of an offering

 

They have a two-month lockup, so no sales by any means until then as far as i know.

[benchmark]

Cayale,  I hear you about the life insurers.  Sun America HAD less exposure to variable annuities, than Manulife, for example.  MFC walked into this protracted low interest rate environment with alot of exposure.  Now Sun America has moved into this business providing the same product, but with lower assumed returns for their life policies, than MFC gauranteed.  Life insurance is a tough business in this environment. 

 

Its a good thing Chartis is a much larger company in the AIG fold.

 

At this point, all I am looking for is a return to value.  $70.00 would nearly triple the value of my warrants, and the Leaps I hold would multiply in value.  60.00 would be good as well.  So would $50 within a year or so, which is not farfetched at all.

 

What leaps do you hold, if you don't mind me asking?

 

I have some warrants, and am considering common, but leaps intrigues me, as the leverage would juice up the returns quite a bit