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AIG - American International Group


PlanMaestro

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The warrants are attractive around $21 from a multi-year tax-adjusted perspective. You should buy the warrants and hold on to them until close to expiration in 2021, so you can defer capital gains as long as possible. AIG warrants have always had a higher imbedded premium because of its longer duration. The value of the warrants could also increase when long term interest rate expectations soar from here.

 

AIG currently trades at the lowest price to book ratio since early 2013, even though the operations measured by the combined ratio are definitely improving. AIG as well as other insurers are currently trading at depressed prices due to lower government bond yields and general market turmoil. The 2y-10y spread is currently quite depressed and should bottom out soon, so that should support yields around these levels. Hopefully, AIG's management has used this turmoil to aggressively repurchase shares. I think selling $50 Jan 2016 puts to buy out of the money Jan 2016 calls would make a lot of sense around these prices.

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I think the language implies they disagree with the scope of the indemnification and will fight it, if it comes to that (though they may not win).

 

Why should current AIG shareholders pay for the previous AIG shareholders.... That doesn't make sense. ::)

This is facetious right?

 

I just want to assess how likely this will happen to AIG and how much damage it could occur.

 

There's a CS research piece out recently which valued the trial risk under $1 share. They assumed 10% chance of Starr winning (recall: AIG pegged this at 15-25% when rejecting the chance to join the suit), 50% chance of the indemnification being effective in that case, and assumed a verdict around $10bn ultimately being paid 5 years from now in that downside case.

 

I don't have this in front of me but I think they called it 20c/share under the assumptions I just mentioned.

 

So my base case is this fear is overblown at the moment, and I've been adding around here via LEAPs.

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I am not buying AIG right now.  I already have a sizeable position.  I am somewhat tapped out after the other sales I took advantage of (BAC, SSW, PWT, WFC). 

 

I am also not expecting the stock to rally in any hurry.  Interest rates are staying low for now, and the overhang of this trial will probably dampen ant stock appreciation. 

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Which is ideal as it allows management to complete and authorize an additional share repurchase plan at these rediciolous prices.

 

I hold a small amount of leaps and a very large warrant position as I knew it would take considerable amount of time to clean up the company (sell non core), improve underwriting, reduce costs and wait for interest rates to rise.

 

Tks,

S

 

I am also not expecting the stock to rally in any hurry.  Interest rates are staying low for now, and the overhang of this trial will probably dampen ant stock appreciation.

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  • 3 weeks later...

AIG Reports Third Quarter 2014 Net Income of $2.2 Billion and Diluted Earnings Per Share of $1.52

http://finance.yahoo.com/news/aig-reports-third-quarter-2014-210500499.html

 

Book value per share of $77.35 grew 15 percent from September 30, 2013; book value per share excluding accumulated other comprehensive income (AOCI) and deferred tax assets (DTA) grew 15 percent to $58.11 over the same period

 

AIG Board of Directors Authorizes Repurchase of Additional Shares of AIG Common Stock, Declares Common Stock Dividend

http://finance.yahoo.com/news/aig-board-directors-authorizes-repurchase-210800455.html

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I keep waiting for the AIG dividend to go over the dividend protection threshold  for the warrants of $.67/year so that my warrants will benefit disproportionately, but it looks like I'll have to wait a little longer.  I have this sneaky suspicion that management is all to aware of this as well.  Hence, more buybacks which is also fine with me while the stock sells below book.

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I keep waiting for the AIG dividend to go over the dividend protection threshold  for the warrants of $.67/year so that my warrants will benefit disproportionately, but it looks like I'll have to wait a little longer.  I have this sneaky suspicion that management is all to aware of this as well.  Hence, more buybacks which is also fine with me while the stock sells below book.

 

There is nothing magical about the dividend protection threshold. It is just a protection because you don't get the dividend you would get with the commons, so it is taken into account. I much prefer them doing a lot of buyback under book value.

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Balance Sheet Question: 

 

For comparative purposes to other insurers which book value should I use:

 

$58.00 ex AOCI, ex DTA

$66.00 ex AOCI

$77.35 ex nothing

 

The AOCI is mostly bond gains from what I can tell.  It seems to me this is reversible in a very short time frame. 

 

The DTA gets used as time goes on and ultimately contributes to book value directly as it is used up. 

 

This is relevant now, more than it was when AIG was trading at $40.  That is the discount to any book value measure is much less than before.  Most of the majors trade in and around 1.3* book value.  AIG should probably be discounted slightly to this premium due to lower quality P&C operations.  Say 1.1-1.2. 

 

If I use $66.00 * 1.1 it gets me a reasonable share price around $72.  So, the discount is still about 25%.  This is important when thinking about Leaps.  40 to 70 was much safer for using Leaps than 54 to 72.

 

Thoughts?

 

 

 

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Balance Sheet Question: 

 

For comparative purposes to other insurers which book value should I use:

 

$58.00 ex AOCI, ex DTA

$66.00 ex AOCI

$77.35 ex nothing

 

The AOCI is mostly bond gains from what I can tell.  It seems to me this is reversible in a very short time frame. 

 

The DTA gets used as time goes on and ultimately contributes to book value directly as it is used up. 

 

This is relevant now, more than it was when AIG was trading at $40.  That is the discount to any book value measure is much less than before.  Most of the majors trade in and around 1.3* book value.  AIG should probably be discounted slightly to this premium due to lower quality P&C operations.  Say 1.1-1.2. 

 

If I use $66.00 * 1.1 it gets me a reasonable share price around $72.  So, the discount is still about 25%.  This is important when thinking about Leaps.  40 to 70 was much safer for using Leaps than 54 to 72.

 

Thoughts?

 

Agree. $66 (more or less) is the number to look at. One can argue that there is still value left, but MOS is gone.

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It might be helpful to think about AOCI in a way similar to the DTA: a non-discounted contingent asset.

 

In a roundabout way, you could say AOCI accrues to earnings as interest rates rise by marking down bond premia but increasing NII.

 

Not worthless, but not worth its undiscounted value. All you need to know is what interest rates will be and how AIG manages their duration. Ha! Simple!

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Balance Sheet Question: 

 

For comparative purposes to other insurers which book value should I use:

 

$58.00 ex AOCI, ex DTA

$66.00 ex AOCI

$77.35 ex nothing

 

The AOCI is mostly bond gains from what I can tell.  It seems to me this is reversible in a very short time frame. 

 

The DTA gets used as time goes on and ultimately contributes to book value directly as it is used up. 

 

This is relevant now, more than it was when AIG was trading at $40.  That is the discount to any book value measure is much less than before.  Most of the majors trade in and around 1.3* book value.  AIG should probably be discounted slightly to this premium due to lower quality P&C operations.  Say 1.1-1.2. 

 

If I use $66.00 * 1.1 it gets me a reasonable share price around $72.  So, the discount is still about 25%.  This is important when thinking about Leaps.  40 to 70 was much safer for using Leaps than 54 to 72.

 

Thoughts?

 

Agree. $66 (more or less) is the number to look at. One can argue that there is still value left, but MOS is gone.

 

Assuming that it's at $66, the discount is still around 30%, and that's a conservative estimate -- are you saying that's not enough for MOS?

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Balance Sheet Question: 

 

For comparative purposes to other insurers which book value should I use:

 

$58.00 ex AOCI, ex DTA

$66.00 ex AOCI

$77.35 ex nothing

 

The AOCI is mostly bond gains from what I can tell.  It seems to me this is reversible in a very short time frame. 

 

The DTA gets used as time goes on and ultimately contributes to book value directly as it is used up. 

 

This is relevant now, more than it was when AIG was trading at $40.  That is the discount to any book value measure is much less than before.  Most of the majors trade in and around 1.3* book value.  AIG should probably be discounted slightly to this premium due to lower quality P&C operations.  Say 1.1-1.2. 

 

If I use $66.00 * 1.1 it gets me a reasonable share price around $72.  So, the discount is still about 25%.  This is important when thinking about Leaps.  40 to 70 was much safer for using Leaps than 54 to 72.

 

Thoughts?

 

Insurers have large bond portfolios which are usually held as "Available for Sale" for accounting purposes. These bonds have to be marked to market as the bond values changes (say, if bonds which have increased in value due to interest rates falling). BW includes these changes. However, liabilities for life insurers, which are also interest rate sensitive are not marked to market. Ex-AOCI basically removes the changes in value of "Available for Sale" from BV. For P&C insurers, we do not need to make this adjustment as liabilities are not very interest rate sensitive.  For life insurers, it makes sense to look at Ex-AOCI.

 

In addition, since DTA's are not operational assets, I would just discount the DTA's for time value and add back to whatever multiple of book value excluding AOCI and DTA that you are using. It does not make sense to use a multiple of DTA when its value is far less that stated value. This makes for better comparision with peers. So 1.1x of 58 + say 70% of DTA value of $11 per share ~ 70 per share.

 

FYI - Management target for 10% ROE is based on excluding both AOCI and DTA.

 

I am just doing these calculations myself as we speak for LEAPS. The way I am looking at is to see what the book value would be at end of 2016.

 

Vinod

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I don't know why you would to exclude AOCI. Mark to market values are more relevant than the historical cost basis.

 

Here you are marking to market the asset but not doing the same for liability. As long as you mark both then yes using mark to market makes sense.

 

Vinod

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Thanks for all the replies.  Good food for thought. 

 

Right now the 2017s are seeming a little tight.  $7.00 for the time value.  If things dont execute perfectly things could get tight.  I am happy enough waiting for a pullback.

 

I have some 2016s, will switch to 2017 when those get to long term gains coming Feb.

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  • 2 weeks later...

There is some room between "gross negligence or willful misconduct" and what the court might find occurred. For instance, Alvarez has repeatedly stated that he thought that they had the authority to do various things that they did -- now it might be the case that they didn't have the authority, but it may not be the case that proceeding on those assumptions is "gross negligence or willful misconduct."

 

So yes, it is possible that AIG is on the hook -- if the indemnity clause is upheld, which may not happen.

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  • 2 weeks later...

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