AIG - American International Group

[orthopa]

Just ran a simple chart comparison and FWIW the warrants have become disconnected like this before and then it resolves. That is way to simplistic to take into account all factors with warrants but worth the visual.

[rohitc99]

i think it may be instructive to look at the GM warrants on this. as the warrants have gone deep in the money, the time premium has gone close to 0. it has jumped around a bit when the stock again dropped, but from what i recall has not exceeded more than 1.5.

 

so my guess is that as the stock rises, the time premium will shrink further quite rapidly

[thomcapital]

i think it may be instructive to look at the GM warrants on this. as the warrants have gone deep in the money, the time premium has gone close to 0. it has jumped around a bit when the stock again dropped, but from what i recall has not exceeded more than 1.5.

 

so my guess is that as the stock rises, the time premium will shrink further quite rapidly

 

I think GM has also devoted more of their cash flow towards growing the dividend vs. share repurchases. That could be part of it too...

[snow pea]

If you're going to make the GM warrant comparison, don't forget that GM warrants don't include any dividend adjustments (and GM now has a meaningful dividend), while AIG warrants have some; this makes the comparison of 'time premium' less straightforward since the 'cost' of the dividends not being received should also be accounted for as part of the overall 'cost of leverage'.

[rpadebet]

Look at JPM, WFC, MTB and other warrants too. Dividend adjustment is only a small factor. As the warrants go deeper in the money, the time premium shrinks quite rapidly. AIG warrants have about 6$ of time premium to burn in 6 years. It most likely won't be linear burn, you could as well see 3-4$ of burn in the next year itself.

 

I think cost of leverage around 2% is a good guide post.

 

I have decided to exercise my leap and hold the stock on margin for a while. Margin costs at IB are cheaper considering dividends expected. The stock doesn't seem to be that under valued given the risks.

[orthopa]

Interesting that time premium would be potentially nearly gone with around half or just less then half of the life of the warrant remaining if it starts to burn off rapidly in the next year or two.

 

With that being the case the warrant and common should move in lock step right? Still gives more then 2.5 times leverage with the cost of the warrant.

 

My though was that the market was taking away time premium bc if large parts of the business are sold and not spun off you are losing time as it would be a near term one time gain and wouldnt have ~5 years of that part o the business generating cash.

[plato1976]

but even so the premium shouldn't totally disappear, right?

 

Interesting that time premium would be potentially nearly gone with around half or just less then half of the life of the warrant remaining if it starts to burn off rapidly in the next year or two.

 

With that being the case the warrant and common should move in lock step right? Still gives more then 2.5 times leverage with the cost of the warrant.

 

My though was that the market was taking away time premium bc if large parts of the business are sold and not spun off you are losing time as it would be a near term one time gain and wouldnt have ~5 years of that part o the business generating cash.

[orthopa]

but even so the premium shouldn't totally disappear, right?

 

Interesting that time premium would be potentially nearly gone with around half or just less then half of the life of the warrant remaining if it starts to burn off rapidly in the next year or two.

 

With that being the case the warrant and common should move in lock step right? Still gives more then 2.5 times leverage with the cost of the warrant.

 

My though was that the market was taking away time premium bc if large parts of the business are sold and not spun off you are losing time as it would be a near term one time gain and wouldnt have ~5 years of that part o the business generating cash.

 

Right, but for some reason time value is worth little to the market at this point

[orthopa]

Let the adjustments begin.....

 

 

AIG Announces Adjustments to Warrant Exercise Price and Shares Receivable upon Warrant Exercise

 

NEW YORK–(BUSINESS WIRE)–Dec. 3, 2015– American International Group, Inc. (NYSE:AIG) today announced that in accordance with the terms of the outstanding warrants (CUSIP number 026874156) (the “Warrants”) to purchase shares of AIG Common Stock, par value$2.50 per share, the Warrant exercise price will be reduced to $44.9036 per share from$45.00 per share and the number of shares of AIG Common Stock receivable upon Warrant exercise will increase to 1.002 from 1.000. Each of these adjustments will be effective at the close of business on December 7, 2015. Any Warrant exercised on or prior to December 7, 2015 will not be entitled to these adjustments.

 

These adjustments resulted from the declaration by the Board of Directors of AIG onNovember 2, 2015 of a dividend of $0.28 per share on AIG Common Stock. The dividend is payable on December 21, 2015, to stockholders of record at the close of business onDecember 7, 2015.

 

Further information on the Warrants and the adjustments to the Warrant exercise price and number of shares of AIG Common Stock receivable upon Warrant exercise, including the U.S. Federal income tax treatment of these adjustments, will be available in the Investors section of AIG’s website.

 

 

5 years of this with modest div increases should really add up.

[rpadebet]

Let the adjustments begin.....

 

 

AIG Announces Adjustments to Warrant Exercise Price and Shares Receivable upon Warrant Exercise

 

NEW YORK–(BUSINESS WIRE)–Dec. 3, 2015– American International Group, Inc. (NYSE:AIG) today announced that in accordance with the terms of the outstanding warrants (CUSIP number 026874156) (the “Warrants”) to purchase shares of AIG Common Stock, par value$2.50 per share, the Warrant exercise price will be reduced to $44.9036 per share from$45.00 per share and the number of shares of AIG Common Stock receivable upon Warrant exercise will increase to 1.002 from 1.000. Each of these adjustments will be effective at the close of business on December 7, 2015. Any Warrant exercised on or prior to December 7, 2015 will not be entitled to these adjustments.

 

These adjustments resulted from the declaration by the Board of Directors of AIG onNovember 2, 2015 of a dividend of $0.28 per share on AIG Common Stock. The dividend is payable on December 21, 2015, to stockholders of record at the close of business onDecember 7, 2015.

 

Further information on the Warrants and the adjustments to the Warrant exercise price and number of shares of AIG Common Stock receivable upon Warrant exercise, including the U.S. Federal income tax treatment of these adjustments, will be available in the Investors section of AIG’s website.

 

 

5 years of this with modest div increases should really add up.

 

This is not as great as it sounds....it is just a total return adjustment. So if you have a 2% div yield on average from here, it is about 10% on top of price return after 5 years.

 

Warrants do provide leverage, but you should compare its cost against cost of leverage provided by leaps and your margin rate.

 

There will be some time premium left in this case as the dividend threshold is low. In case of jpm, Mtb the div threshold was high so time premium burn was severe.

 

The bigger question and potentially larger profit potential would be from how the business operates from here. Will they be able to avoid sifi? Will they provide adequate Roe? Will they be more efficient? Will the be more disciplined in underwriting? Will they sell off assets and at what price?

[orthopa]

Let the adjustments begin.....

 

 

AIG Announces Adjustments to Warrant Exercise Price and Shares Receivable upon Warrant Exercise

 

NEW YORK–(BUSINESS WIRE)–Dec. 3, 2015– American International Group, Inc. (NYSE:AIG) today announced that in accordance with the terms of the outstanding warrants (CUSIP number 026874156) (the “Warrants”) to purchase shares of AIG Common Stock, par value$2.50 per share, the Warrant exercise price will be reduced to $44.9036 per share from$45.00 per share and the number of shares of AIG Common Stock receivable upon Warrant exercise will increase to 1.002 from 1.000. Each of these adjustments will be effective at the close of business on December 7, 2015. Any Warrant exercised on or prior to December 7, 2015 will not be entitled to these adjustments.

 

These adjustments resulted from the declaration by the Board of Directors of AIG onNovember 2, 2015 of a dividend of $0.28 per share on AIG Common Stock. The dividend is payable on December 21, 2015, to stockholders of record at the close of business onDecember 7, 2015.

 

Further information on the Warrants and the adjustments to the Warrant exercise price and number of shares of AIG Common Stock receivable upon Warrant exercise, including the U.S. Federal income tax treatment of these adjustments, will be available in the Investors section of AIG’s website.

 

 

5 years of this with modest div increases should really add up.

 

This is not as great as it sounds....it is just a total return adjustment. So if you have a 2% div yield on average from here, it is about 10% on top of price return after 5 years.

 

Warrants do provide leverage, but you should compare its cost against cost of leverage provided by leaps and your margin rate.

 

There will be some time premium left in this case as the dividend threshold is low. In case of jpm, Mtb the div threshold was high so time premium burn was severe.

 

The bigger question and potentially larger profit potential would be from how the business operates from here. Will they be able to avoid sifi? Will they provide adequate Roe? Will they be more efficient? Will the be more disciplined in underwriting? Will they sell off assets and at what price?

 

I agree with the adjustment, essentially just a dividend reinvestment mechanism correct? Ill still take 10% over time. :)

 

Im going to have to go back and re read the cost of leverage thread but are you implying the div/div adjustment is what cause the apparent recent premium burn? For example the cost of leverage now is 4.3% compared to 5.25% for the BAC warrants but the AIG have 2 years longer to expiration? :o Shouldnt there be more premium or is it because the warrants are more in the money now?

[benhacker]

I agree with the adjustment, essentially just a dividend reinvestment mechanism correct? Ill still take 10% over time. :)

 

Im going to have to go back and re read the cost of leverage thread but are you implying the div/div adjustment is what cause the apparent recent premium burn? For example the cost of leverage now is 4.3% compared to 5.25% for the BAC warrants but the AIG have 2 years longer to expiration? :o Shouldnt there be more premium or is it because the warrants are more in the money now?

 

Allow me to take a stab to summarize this warrant to common equivalence in plain English, as I think many remain somewhat confused:

 

So if we value common stock, and we think it is very cheap, warrants will (almost) always seem cheaper because they carry internal leverage.  However, if you want to determine if warrants (or options, or similar) are mispriced, the proper way to value them isn't looking at your expectation of what the common stock will do, it is to look at what other tools are available in the market to replicate *exactly* what warrants offer.

 

Eric's "cost of leverage" thread is just this.

 

Warrants provide you with the right to buy X shares (with maybe dividend or other adjustments) between now and the future.  They are leveraged because you can put up less money now to get access to the larger number (X) than if you just paid cash upfront for the stock.  This is leverage (with warrants, you have non-recourse leverage, because you can't lose more than your initial investment)

 

So you can do this another way... borrow money to buy stock (oh no, the horrors!!!).

 

So for some reason, many folks on this board seem to not think this way, because the idea of using margin is like evil or something.... but if you combine margin, with puts, you can construct what is in effect a warrant (it's not perfect, but you can make assumptions).

 

So if i borrow money (margin loan) at 1% today, and I can buy puts for $X to protect below $45 for AIG, you can value what the MARKET is asking you to pay for creating a leveraged (with puts it becomes non-recourse) non-recourse position via this "synthetic warrant" (you can at least approximately value this).

 

Dividends affect this value, cost of rolling puts over the years affects this (put premium may be less or more next year or two when you roll them), and of course margin rates may not stay at 1%.  But those are your variables, when you buy a warrant, you are effectively locking in the cost of the margin + puts TODAY for the whole time horizon, and you need to decide if that is a fair price.  I would argue if you don't do a calculation *like this* (maybe not the exact same way) you are not valuing warrants, you are valuing a stock and just taking on any leverage because it always seems like a good idea to lever up a cheap stock.

 

Does this make sense?

 

None of this answers why the premium for AIG or BAC or other warrants move around, but does suggest how you might think about what a fair price is.  But this really does explain why WFC warrants for example have no premium... because they shouldn't have much / any (in an efficient market).

 

WFC pays a decent dividend (that isn't adjusted by the warrants) that is basically enough to carry the margin loan costs to buy all the WFC shares you want, and the warrant is so far in the money, that buying puts 35% below the current price is super duper cheap.  So the WFC warrants will in most cases provide better return than WFC common, but it comes with taking more risk... just like if I levered up WFC common at 1% and said "wow, I'm going to make a lot more money then WFC investors... I'm so smart".  But I think you could do that with leverage + puts for just as cheap (Haven't checked the quote today, but basically WFC.ws should have close to zero premium.

 

Now, all my blathering is mostly irrelevant for a few types of potential warrant investors:

1) If you don't have access to margin / options (Legal mandates, IRA, shitty broker, etc) than maybe warrants have more value to you than they do to a market maker - great, than this is a win-win exchange of goods, we have arbitraged a regulatory or other hurdle, but we shouldn't confuse it for what the warrant is "worth" or think it's mispriced, it's probably not (and of course sometimes it is!).

2) Trading convenience - for warrants, they are one and done, you can buy 72 shares of AIG.ws, or BAC.ws.A, but you can't really hedge 72 shares easily, and then roll it over every year, so warrants are nice cause they package it all up for you and you can kind of simplify things.

 

Again, I think these last two points are mostly irrelevant for thinking about what warrants are *worth*.

 

Ben

 

PS - The above really ignores the  goodness that drives a lot of B/S option pricing formulas which measure vol, and assumes some level of price continuity.  I think for most investors in warrants, that isn't a huge deal, and if it is, is mostly factored in by pricing the put alternative into your model.... but, this summary was supposed to be a different take, on Eric's basic point on this, if the intermediate behavior of warrant pricing with respect to common in high vol environments is of interest, maybe some of that could be helpful to think about.  Note, I think Joel Greenblatt covered this warrant / option discussion best in his first book (although Eric is good too. ;-) ).

 

PPS - I would argue because of the above commentary  that most warrants are structurally OVERVALUED because the natural buyers are paying a premium to intrinsic value because they are buying regulatory arbitrage (getting leverage where no ok otherwise) or are getting mental barrier arbitrage (I just made this up!) - taking on leverage that isn't considered leverage in their mind.

[rpadebet]

good summary benhacker.

Before i had an IB account I was stuck with a high margin rate broker. The compliance division in my firm forced me to have that broker. Warrants were attractive low cost leverage then. In my roth account i obviously couldn't buy options, but warrants were OK.

 

Given the margin rates available via various brokers, warrants may be structurally attractive to a lot of investors. Over priced or under priced depends on your margin rate :)

 

[rohitc99]

based on benhacker's post, some rough calculations with lots of assumption

 

current AIG put @45 for jan 2018 = 2.32 ...so with assumption rough cost for put/ year = 1.16. For warrant period, cost of puts = 8

Dividend yield = 1.8% ..assume this cover the cost of leverage

warrant cost = 25-(64-45) = 6

 

So warrant seems to be underpriced by $ 2 for now, but maybe not if this worked out more precisely. As the stock rises, the embedded put will continue to lose value and hence the higher time decay. If i recall correctly, thats same argument made by eric and others earlier

[benhacker]

Here's the way I look at it (common @$64, warrant @ $25) (don't forget that to make the two comparable, you are leveraging up with some cash upfront, so 25/64, would require 61% of purchase price for common + puts case to be on margin, not 100%):

 

$6 in time premium means cost of leverage for warrants is 1.76% / year (straight line measured until expiration, as a % of stock price)

Warrants additionally lose out on the div threshold, so that is another 1.1% annually.

 

So I would simply say that warrants cost (all in) to get common like returns at that non-recourse leverage point is 2.86% annually.

 

For an equivalent common purchase, 61% of your purchase of common will need to pay margin rates of ~1.5%.  Call it 1% overall.

 

That leaves 1.86% / year to spend on puts.

 

At current 2017 and 2018 pricing, you are looking at 1.08 - 1.16 / year (roughly, really 13 months) in put costs, so for 13 months, I'd use the lower side to get 12 month equivalence.

 

1.08 * 5 = $5.4 (I think you made an error here, we are almost exactly 5 years from expiration, not 7 which is what I think your math implied when you turned $1.16 into $8 in cost).

 

$1.08 / 64 = 1.68% / year.

 

So based on my math, we are within rounding error to say that warrants cost 2.86% annually, and common + puts cost 2.68%.  So it's a wash.  But you'll see that small changes here make the warrants move all around in terms of "correct" pricing, so let's not fool ourselves with too much precision.

 

I would argue that the warrants would favor anyone who believes the following (fundamentally):

1) higher margin rates over the cycle

2) higher vol pricing for AIG over the cycle

 

But at parity, I would think the MM selling you AIG.WS will make money (they borrowing will likely be <1.5% over the life of warrants), and you probably will be pleased to buy this leverage in a convenient package.

 

Ben

 

PS - I own AIG.ws in IRA accounts I manage.  I also own AIG common generally.

 

 

 

 

 

[orthopa]

Here's the way I look at it (common @$64, warrant @ $25) (don't forget that to make the two comparable, you are leveraging up with some cash upfront, so 25/64, would require 61% of purchase price for common + puts case to be on margin, not 100%):

 

$6 in time premium means cost of leverage for warrants is 1.76% / year (straight line measured until expiration, as a % of stock price)

Warrants additionally lose out on the div threshold, so that is another 1.1% annually.

 

So I would simply say that warrants cost (all in) to get common like returns at that non-recourse leverage point is 2.86% annually.

 

For an equivalent common purchase, 61% of your purchase of common will need to pay margin rates of ~1.5%.  Call it 1% overall.

 

That leaves 1.86% / year to spend on puts.

 

At current 2017 and 2018 pricing, you are looking at 1.08 - 1.16 / year (roughly, really 13 months) in put costs, so for 13 months, I'd use the lower side to get 12 month equivalence.

 

1.08 * 5 = $5.4 (I think you made an error here, we are almost exactly 5 years from expiration, not 7 which is what I think your math implied when you turned $1.16 into $8 in cost).

 

$1.08 / 64 = 1.68% / year.

 

So based on my math, we are within rounding error to say that warrants cost 2.86% annually, and common + puts cost 2.68%.  So it's a wash.  But you'll see that small changes here make the warrants move all around in terms of "correct" pricing, so let's not fool ourselves with too much precision.

 

I would argue that the warrants would favor anyone who believes the following (fundamentally):

1) higher margin rates over the cycle

2) higher vol pricing for AIG over the cycle

 

But at parity, I would think the MM selling you AIG.WS will make money (they borrowing will likely be <1.5% over the life of warrants), and you probably will be pleased to buy this leverage in a convenient package.

 

Ben

 

PS - I own AIG.ws in IRA accounts I manage.  I also own AIG common generally.

 

Great explanation, thanks!

[marazul]

Someone knows what happens to the warrants if there is a spinoff or the company gets split in two?

[fareastwarriors]

AIG to Buy Back Another $3 Billion of Stock Amid Icahn Pressure

 

http://www.bloomberg.com/news/articles/2015-12-16/aig-boosts-shares-repurchases-with-3-billion-authorization-plan

[fareastwarriors]

AIG to Buy Back Another $3 Billion of Stock Amid Icahn Pressure

 

http://www.bloomberg.com/news/articles/2015-12-16/aig-boosts-shares-repurchases-with-3-billion-authorization-plan

 

 

 

AIG’s chief executive begins fightback against activist investors

http://www.ft.com/intl/cms/s/0/17b2a0ca-a944-11e5-843e-626928909745.html#axzz3vda9BF9H

ft-12-28-15.pdf

[fareastwarriors]

A.I.G. Investors Unhappy With Insurer’s Strategy, Advisory Firm Says

 

http://www.nytimes.com/2016/01/13/business/dealbook/aig-investors-unhappy-with-insurers-strategy-advisory-firm-says.html?ref=dealbook

[orthopa]

With Metlife's actions there is going to be even more pressure on AIG to de SIFI. Will be interesting to see what the strategy is on the conference call on earnings day.

[rishig]

AIG announces strategic actions:

http://www.aig.com/Chartis/internet/US/en/Investor%20Update%20Presentation%201.26.16_tcm3171-713944.pdf

[ourkid8]

I smell a proxy battle.  I wish I would be able to participate however as a Warrant holder i'll sit back and watch the show.  Either direction is a win/win. 

 

AIG announces strategic actions:

http://www.aig.com/Chartis/internet/US/en/Investor%20Update%20Presentation%201.26.16_tcm3171-713944.pdf

[orthopa]

AIG returned 12B to shareholders in 2015 and plans 25B over next 2 years. What has changed? Where is the new plan?

 

The decision to seperate out the legacy stuff looks a little Citi-esk. It will give shareholders a better idea how good the new stuff is and how bad the old stuff is.

 

I still have to read through the presentation and listen to the conference call but it looks like management is hell bent on keeping the DTAs. Im not an accounting pro so anyone else feel free to chime in but are the DTAs really that valuable?

 

If (and its a big if) the company breaks up projections are the value unlocked would be worth way more then the DTAs are worth. Granted these could be rosy expectations but why does management want these DTA's so bad?

 

I read an analyst opinion that the selling of the Mortgage unit is a lateral move value wise and the market has cooled for that business.

 

Frustrating for a shareholder/warrant holder. Is it really this hard to get this to trade at book value?

 

 

[orthopa]

Just some quick math.

 

Market cap is 68B. Company returned 12B last year and 25B next to years. Some of this is cannibalization but what gives, why still trading under book?