American International Group (AIG) has made necessary steps towards placating the public's trust and separating itself from the negative notoriety. Even with the soft market seen in the consumer insurance industry this quarter, this stock has exhibited a reasonably good quarter; up 36.77% YTD (01.02.13-11.01.13). During the same period, AIG also continued minor share repurchases by investing $192 million to buy back four million shares. With a 17% increase in net income and diluted earnings-per-share at $1.46 for the third quarter 2013 versus $1.13 for the same quarter in 2012, an increase of 30%, many investors were alarmed by CEO Bob Benmosche insinuating that AIG might not meet some its goals in a conference call with analysts on Friday. These comments in addition to an underwriting loss at its property-causality unit precipitated AIG's biggest decline in the Standard and Poor's 500 Index.
Falling Short of Expectations
On Friday's closing, November 1st, the insurer dropped $3.37 or 6.5% to $48.28. Property-causality division is AIG's largest division. This was reflected in the operating ROE, which was 6.2% versus 7% last year. Benmosche told analysts that he would stop providing specifics on the company's goals, highlighting a 10% return on equity target for 2015. In an interview with Bloomberg Television's Betty Liu, he stated, "We are proud of what we have accomplished so far, we're working hard to achieve all those aspirational goals… our only concern is if we can get there by 2015." While this prospective shortcoming seems inevitable, perhaps this is not as much of a setback as it may seem. AIG is still at a huge discount from its tangible book value, suggesting that the stock offers a margin of safety even if this insurer does not yield growth as quickly as expected.
Reflection of Why AIG is in This Situation
Three years post the United States Federal Reserve Bank bailout; AIG presented their revised targets. Private capital was required to replace funding from the government. After being bailed out by the United States Federal Reserve Bank commencing on September 16th 2008, AIG shared their aspirational goals later in 2011, when they needed to persuade private capital to replace the government funding. Essentially, in order to dig themselves out from one hole they ended up unearthing another by making perhaps somewhat lofty aspirational goals that would mollify private investors and diminish fears. These goals, such as generating $25 billion to $30 billion of capital for buybacks, dividends, acquisitions and organic growth are still possible, but perhaps the target date set seems to be too aggressive.
Many investors are anxious about how AIG will finally sell off its aircraft-leasing subsidiary, International Lease Finance Corp (ILFC). ILFC is a major contender with relationships with over two hundred airlines and 1,000 aircraft. So while selling this business has not been easy, they are an attractive company. Even though the ILFC is a non-core asset, it could still hold substantial worth for AIG if it is not immediately sold. Emerging markets are creating more demand for air travel making the aircraft-leasing market more stable. However, this is not the plan. In the conference call to analysts Benmosche conferred how AIG is still working on an alternative sale or an initial public offering, as they would like to make a final decision and take action during the fourth quarter. As the aircraft-leasing unit is a prerogative on the list of non-core assets to be sold after the bailout, the final sale will be viewed as affirmative for those investing in this insurer.
When AIG finally does sell ILFC, the capital received could be used towards additional share buybacks helping them achieve the aspirational goals that were previously set forth in 2011. This would enhance shareholder value as the shares are currently trading less than book value.
The Good, The Bad & The Ugly
Chief executive officer Bob Benmosche told the public that AIG might not fulfill the company's aspirations in the time they allotted for themselves. Furthermore, there is additional uncertainty as he did not address which goals exactly AIG could not achieve. To make things worse, selling ILFC with the consortium is not yet definitive. "We still feel they are making slow progress …" said Benmosche to analysts. Not to mention, the public has not forgotten that AIG nearly failed only five years ago and there is some sentiment still about bonuses on the American tax dollar.
On the other hand, AIG had a decent third quarter, not perfect, but decent. The company had 34% growth from 3Q12 in new insurance written. A positive trend can be seen here as well from 3Q11 in Chart 1 taken from AIG's conference call presentation.
AIG's 3Q13 after-tax operating income was $1.4 billion with an after-tax operating income per share ascribable to AIG of $0.96. AIG also reported net income of $2.2 billion for 3Q13 compared to $1.9 billion 3Q12. On September 30th 2013, shareholders equity totaled at $98.8 billion. AIG also paid cash dividends totaling 1.9 billion in 3Q13. Overall these numbers are promising.
AIG may not and probably will not accomplish all of their promises to investors back in 2011, but they have certainly made significant steps. In fact, AIG has had a return YTD of over 36% compared to the S&P 500 with a return of 23.51% over the same period. (Chart 2)
The red line represents the S&P 500 YTD. The blue line represents AIG YTD.
CEO Robert Benmosche became the chief executive officer in 2009 during some of the most turbulent times for the company. In 2011, he needed to present an optimistic impression to private capital in order to make the transition back into private equity. If he had not done so, AIG may still have owed the Federal Reserve some of the $180 billion borrowed. Some may view this as not being forthright, however they have made progress as promised, just not as quickly. Benmosche has been steadfast in AIG's pursuit of returning to a market leader. Investors should remain confident and keep their faith in AIG as the CEO's ambitions are in line with the shareholders.
I Know First AIG Forecast
I Know First uses an algorithm to forecast stock performance and to generate stock market forecasts. In a nutshell, the algorithm identifies stocks trading in ranges that deviate drastically from the trends the algorithm deems rational. The algorithm's methodology is discussed in more detail in Citigroup's Competitive Advantage under the section titled Algorithmic Prediction for Citigroup (C). Chart 3 shows I Know First's predictions for AIG in the 1-month and 3-month time horizons. The dark green demonstrates that the algorithm is strongly bullish.
AIG has certainly exasperated investors and analysts between Benmosche's comments, uncertainty about ILFC, and some disappointments in certain divisions such as the property-causality division. However, do not jump ship. AIG is recovering from a major hit and is back on track. There will be bumps in the road, and everything will not go exactly as originally planned. Stockholders are interested in the growth of the share price and increased company value. The personal interest of CEO Benmosche does not conflict with the interest of the shareholders. Remember that he became CEO in 2009, when the market was in turmoil, not in the bullish market beforehand. His comments last week should be viewed as transparency from the managers. AIG is in an upward trend and these hiccups are merely day-to-day noise.
Business disclosure: I Know First Research is the analytic branch of I Know First, a financial startup company that specializes in quantitatively predicting the stock market. This article was written by Joshua Pastore one of our interns. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.