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This background is likely redundant to most investors, but it is presented below to highlight the events that are now being repeated under the "New AIG".

A Brief History of Bad Decisions at (AIG)

After the ouster of its CEO, Hank Greenberg, in 2005 amid fraud investigations by the SEC, AIG began investing billions of dollars in mortgage backed securities. AIG desperately needed investment returns in the low interest environment. Mortgage backed securities seemed the obvious choice.

During the collapse of Lehman Brothers in September 2008, AIG's mortgage backed securities were downgraded. As a result, AIG was required to provide additional collateral for the difference in the value of these securities. AIG did not have the cash, so the Federal Reserve Bank stepped in and purchased the distressed securities. These securities were placed in a separate LLC company and eventually sold off.

As part of the transaction, the Federal Reserve Bank made available to AIG an initial credit facility of $85 billion that was later increased to $182 billion. AIG also obtained special tax treatment on its losses to the tune of approximately $26 billion in deferred tax assets. AIG will likely not be paying taxes for the next 10 years.

In exchange, AIG issued warrants to the Federal Reserve Bank for 80% of the equity of the company. AIG eventually lost 95% of its stock value. The stock fell from $29.89 on August 5, 2008 to $0.35 on March 5, 2009 (pre 1 for 20 reverse spilt amounts).

An investor buying 100 shares of AIG on Aug 5, 2008 would have seen that investment of $2,989 shrink to $188.95 today.

To pay down the loans received from the Federal Reserve Bank, AIG embarked on a strategy to sell off businesses that were deemed to be non-core. Many of these could have been developed as they provided footholds in high growth markets.

  1. Nan Shan Life Insurance Co in Taiwan for $2.2 billion
  2. AIA Group Ltd. via a public offering that raised $20.5 billion. AIA was the largest Hong Kong insurance company in terms of the number of policies.
  3. 90 percent of its airplane leasing unit to Chinese investors for about $5.3 billion
  4. $5.4 billion in Asia real-estate funds to Invesco for an undisclosed sum

After these sales, AIG consisted primarily of property/casualty and low margin life insurance business.

Several of the remaining businesses were renamed in an attempt to distance them from the AIG name. An example, American International Underwriters [AIU] - which consisted mainly of commercial insurance - was renamed Chartis.

In April 2012, desperate for investment returns, AIG announced its plan to jump back into property investing with the focus on the US apartment market.

AIG completed paying back the Federal Reserve Bank in December 2012. In conjunction with this AIG launched an ad campaign that consisted of thanking the US taxpayer for bailing them out, slightly changing their AIG logo, and renaming their Chartis subsidiary AIG Property Casualty. At the same time AIG was contemplating joining an opportunistic lawsuit filed by a group of its shareholders (led by the former CEO Hank Greenberg) to sue the government. After public backlash, AIG declined to join the suit.

Analysis of Annual Report

The following points were noted during review of the latest annual report. Supporting detail was provided when possible.

1 - The number of net premiums written in the America's region by the AIG Property Casualty unit (69% of total revenues) is falling. In addition the Asia Pacific region had consistent year over year growth, but is likely to end in 2013 with the sale of the remaining equity stake in AIA.

Year

Region

2012

% Total

2011

% Total

2010

% Total

Americas

17,614

51%

18,144

52%

18,035

57%

Asia Pacific

10,448

30%

10,062

29%

7,152

23%

Europe, Middle East, Africa

6,374

19%

6,634

19%

6,425

20%

TOTAL

34,436

34,840

31,612

2 - At first glance, revenue from continuing operations appears inconsistent when comparing operating segments.

Revenues by Year

Insurance Segment

2012

% Change

2011

% Change

2010

AIG Property Casualty

39,781

-2%

40,722

9%

37,207

AIG Life and Retirement

16,767

9%

15,315

4%

14,747

TOTAL

56,548

1%

56,037

8%

51,954

Other Operations

9,108

141%

3,775

-82%

20,875

TOTAL

65,656

59,812

72,829

But review of the detail exposes a consistent decrease in premium revenue.

Revenues

2012

2011

2010

2009

2008

Premiums

38,011

38,990

45,319

48,583

60,147

Policy fees

2,791

2,705

2,710

2,656

2,990

Net investment income

20,343

14,755

20,934

18,992

10,453

Net realized capital gains (losses)

929

701

(716)

(3,787)

(50,426)

Other income

3,582

2,661

4,582

3,729

(34,941)

Total revenues

65,656

59,812

72,829

70,173

(11,777)

3 - AIG is compensating for the shortfall in premium revenues by investing in high return / high risk assets to inflate investment income. The following table details the movement of invested assets (fair value measurement).

Amounts in $ millions

12/31/2012

12/31/2011

$ Change

% Change

Bonds

US government

10,277

12,540

(2,263)

-18%

State, municipals

35,705

37,755

(2,050)

-5%

Non-U.S. governments

26,802

25,770

1,032

4%

Corporate debt

152,432

145,634

6,798

5%

RMBS (Real Estate Mortgage Backed Securities)

36,119

36,252

(133)

0%

CMBS (Commercial Mortgage Backed Securities)

12,370

9,783

2,587

26%

CDO/ABS (Collateralized Debt Obligations / Asset Backed Obligations)

20,838

20,611

227

1%

Total Bonds

294,543

288,345

6,198

2%

Equities

3,874

3,749

125

3%

Other Invest Assets

7,190

20,983

(13,793)

-66%

Derivatives

7,047

9,660

(2,613)

-27%

Short Term Investments

8,056

5,913

2,143

36%

Separate Accounts

57,337

51,388

5,949

12%

Other Assets

696

-

696

N/A

Counterparty netting

(3,376)

(5,161)

1,785

-35%

Total Equities / Other

80,824

86,532

(5,708)

-7%

TOTAL ASSETS

375,367

374,877

490

0%

4 - A shift toward investments with lower ratings is evident.

Composite of AIG Credit Ratings of Fixed Income Securities

Rating

12/31/2012

12/31/2011

Change %

AAA

17%

21%

-19%

AA

17%

20%

-15%

A

24%

22%

9%

BBB

28%

25%

12%

Below investment grade

13%

10%

30%

Non-rated

1%

2%

-50%

TOTAL

100%

100%

Investment Strategy

From the evidence presented AIG has no qualities to be deemed an investment. The following points are noted:

  1. Management is purchasing high risk investments seeking return, namely US real estate market securities
  2. Non-core assets that were footholds in high growth markets were sold
  3. Revenues from the core insurance operations are falling
  4. Average ratings on fixed maturity investments are degrading

When interest rates begin to increase the company will be faced with the same liquidity crisis it faced in 2008, but this time AIG, the government, and the public are all in weaker positions to tolerate a bailout. The company will either have to go bankrupt or be nationalized / downsized in some form.

AIG stock is expensive at any price.

Source: AIG Is Expensive At Any Price