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.
- Nan Shan Life Insurance Co in Taiwan for $2.2 billion
- 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.
- 90 percent of its airplane leasing unit to Chinese investors for about $5.3 billion
- $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.
Europe, Middle East, Africa
2 - At first glance, revenue from continuing operations appears inconsistent when comparing operating segments.
Revenues by Year
AIG Property Casualty
AIG Life and Retirement
But review of the detail exposes a consistent decrease in premium revenue.
Net investment income
Net realized capital gains (losses)
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
RMBS (Real Estate Mortgage Backed Securities)
CMBS (Commercial Mortgage Backed Securities)
CDO/ABS (Collateralized Debt Obligations / Asset Backed Obligations)
Other Invest Assets
Short Term Investments
Total Equities / Other
4 - A shift toward investments with lower ratings is evident.
Composite of AIG Credit Ratings of Fixed Income Securities
Below investment grade
From the evidence presented AIG has no qualities to be deemed an investment. The following points are noted:
- Management is purchasing high risk investments seeking return, namely US real estate market securities
- Non-core assets that were footholds in high growth markets were sold
- Revenues from the core insurance operations are falling
- 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.