Why I Bought AIG Last Week 24 comments
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I have a confession to make: Last week I bought AIG (AIG). Even with all of its faults it was simply too cheap to pass up at 2 dollars and change. Despite the government's bailout proposal there was, and still is, substantial value left in the company. Even after accounting for an 80% dilution of the common shareholders, the company still has a book value as of the end of the most recent quarter of $5.80.
While there are significant risks in owning AIG, namely accelerating losses in the company’s credit default swap [CDS] portfolio, which I talked about back in mid May, the potential upside that exists as a result of the sale of company assets far outweighs the risks associated with owning the stock at these price levels.
The government bailout is certainly a terrible deal for AIG’s current shareholders. The deal’s premise is built on the fact that a government rescue was necessitated by the possibility that a failure of the company would bring about an utter failure of the credit markets. An intervention based on an attempt to provide the liquidity that the company needed was certainly warranted and as I mentioned earlier, I applaud the Bush Administration's rescue efforts. The government’s $85B dollar loan and controlling stake in AIG will provide just what the company needs; however, I doubt the deal will go through, as it will still likely require shareholder approval.
If AIG's large shareholders can block the deal, as it appears they are trying to do, the shares will soar as the company begins to unload its assets. The tentative agreement between AIG and the government has without a doubt bought the company a small window during which it has the support of the financial markets to unload its assets. If these asset sales can be carried out fast enough, the agreement can likely be terminated prior to the company having to ask its shareholders for the agreement's approval.
In looking at the company’s assets, it is clear that significant value can be realized from the sale of numerous subsidiaries. To start with, we can use Melissa Gannon’s article that was written over at thestreet.com. Ms. Gannon did a wonderful job of breaking out AIG’s three most likely U.S. domiciled subsidiaries to be sold. They are the following:
- Lexington Insurance (fire insurance) – $4.7B in Capital, $6.6 B in annual premiums;
- National Union Fire Insurance (liability) – $12.0B in Capital, $5.5B in annual premiums;
- American Home Assurance (workers comp & liability) – $7.0B in Capital, $ 6.7B in annual premiums.
These companies, with their strong balance sheets and relatively sound investment portfolios will likely fetch one times book value, or about $23.7B. While these sales will go a long way towards freeing up capital and much needed liquidity for the company, they cannot be the only ones undertaken. AIG’s foreign subsidiaries are surprisingly sound and have been able to sustain their operating margins throughout the credit crisis. As a result, their sales will likely be the most important for the company.
According to my rough calculations, the company could raise anywhere between $10.8B & $14.4B from the sale of both its Foreign Life & Foreign General subsidiaries for a total of between $21.6B and $28.8B. These sales will allow the company to refocus on the company’s core area of alleged competence, domestic insurance.
In addition to the sale of three of its domestic insurance units and the sale of its foreign units, the company will also be able to raise a substantial amount from the sale of its ILFC unit. The company’s aircraft leasing business simply has no place in a slimmed down AIG. If you were to assume that ILFC’s margins were only a little lower then GATX Corp. (GATX), the publicly traded railcar leasing company, I believe that we could safely value the company at somewhere near $5-$7B.
Other investments such as a controlling stake in Transatlantic (TRH) and a stake in Blackstone (BX) coupled with an investment being managed by the money management firm could be sold for nearly $3.9B. For those keeping track the successful sales of the above-mentioned units could yield between $54.2B and $63.4B.
In addition, AIG could also attempt to monetize its massive money management unit. The firm currently manages in excess of $750B dollars. The majority of the money is tied to the company's investment portfolio related to its insurance policy reserves and the float that comes along with being an insurance company. In my opinion, if the sale is structured appropriately, AIG could easily expect to generate an additional $15B-$22B.
While this would dramatically reduce the input that AIG has on its future, it is likely for the best and without a doubt the most critical piece of the value story at AIG. Possible suitors include BlackRock (BLK) & overseas financial institutions and sovereign wealth funds. The sale of AIG’s asset management unit would bring the total amount raised by the company through the above mentioned asset sales and the above assumptions into the neighborhood of $69.2B-$85.9B.
While the subsidiary sales that I outlined above would be drastic and would lead to the dismembering of a storied company, they are likely the only option available to the firm and its investors in their effort to avoid the completion of the public bailout and the sacrifice of shareholder value. The cornerstone of my plan, the sale of the company’s asset management unit, would likely improve risk management and allow what is left of AIG to focus on writing profitable insurance in its remaining domestic markets.
Upon the completion of these sales, it would be my hope that AIG could move towards competing directly with companies such as Travelers (TRV), Chubb (CB) & Allstate (ALL). It's going to be a long trek for AIG shareholders but if we can force management to begin an immediate sale of the more valuable parts of the company we may just be able to unlock shareholder value that appeared to be lost not a week ago. As I wrote in early May, AIG has truly fallen from a blue chip stock to unquestionable mediocrity; nevertheless, even broken companies, when reorganized appropriately, can yield great returns.
For Further Review:
Disclosure: Long AIG
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This article has 24 comments:
if ben and paulson cared the same about AIG as they cared about morgan and goldman, they could have prevented short sellers from pushing AIG below 10 and could have prevented AIG from being downgraded.
they also could have given AIG just a bridge loan without requesting any equity stake and at the same time threatening the public with this false AIG's "takover".
AIG was beaten up by the shorts as much as it was robbed and used by paulson to coerce the public opinion.
this is so obvious and blatantly wrong. shareholders and many parties with vested interest in AIG are going to correct this atrocity!
as I see it, the warrant structure has already been chosen for the fed to have the option to not take AIG over. In any case AIG below $3 looks like obe of the best opportunities in finaical stocks out there because further downside imho is almost non-existant. except, if you expect financial armageddon. But then again, my small, speculative stake in AIG might be the least I will worry about.
If AIG pays off the loan and enought shareholders scream, the warrants will ot get exercised, at least not at a nominal price.
Any guesses on a short-term top? I'm thinking $10 range within the next couple weeks.
The asset management unit *is* profitable, and is not the unit that exposed the entire company to this debacle. It has not been a drag on risk management, nor had it deterred the insurance divisions from being very profitable.
Contrast this with Paulson's almost instantaneous reaction to his former firm Goldman falling below 100 (seriously - look at the charts for GS from last week and see when the word of the planned bailout went out).
Steve Forbes gave a speech over lunch here in town today and he described the deal that was imposed on AIG as "something that would have impressed Tony Soprano" - I'd agree with that, for certain.
I do think there will be significant pressure on the government to treat AIG shareholders more fairly than the cramdown the government is trying to do.
Anything else really sends a clear message that speculators and ibank trading desks will be rewarded at the expense of long term investors.
And if that is the investment climate America plans to create, that only makes foreign markets seem more attractive (some markets anyway - I'm not talking about the (e.g.) Karachi and Caracas stock exchanges - LOL)
Contrast this with Paulson's almost instantaneous reaction to his former firm Goldman falling below 100 (seriously - look at the charts for GS from last week and see when the word of the planned bailout went out).
Steve Forbes gave a speech over lunch here in town today and he described the deal that was imposed on AIG as "something that would have impressed Tony Soprano" - I'd agree with that, for certain.
I do think there will be significant pressure on the government to treat AIG shareholders more fairly than the cramdown the government is trying to do.
Anything else really sends a clear message that speculators and ibank trading desks will be rewarded at the expense of long term investors.
And if that is the investment climate America plans to create, that only makes foreign markets seem more attractive (some markets anyway - I'm not talking about the (e.g.) Karachi and Caracas stock exchanges - LOL)
Stay in if you've got the ba**s!!!
this is just forcing AIG to sell its assets very quickly otherwise AIG will bleed to death very quickly!
how the US govt is raping one of its best companies is just beyond comprehension!
in 2 years they will accrue 18.5bn additional interest payments to the fed.
they will divest the non-core busenesses. but aren't those the most profitable? who would engage in non-core activities if they are less profitable? certainly they are more capital intensive than the core insurance business.
so what will be thier earnings potential afterwards?
See
www.crossprofit.com/ar...
It's not that simple at all.
Disclosure: no current position.
Assuming AIG pays off the $85 billion loan within 2 years - what happens to Treasury's 80% stake? Does it get canceled or are we to assume that the US Government is a permanent shareholder no matter what happens?
If it is the latter scenario, I doubt very much there will be much upside to this stock.
Another thing you have to remember is that book value, as irrelevant as it is at the moment matters only if you are trying to look at the liquidation value of the company. Why are you looking at AIG from liquidation point of view if you already know that the gov. essentially told you that AIG isn't subject to a liquidation?
So forget about book value and look at AIG as a going concern.
What do the earnings look like now and how are they going to look like in the future? What would be left after the massive debt is serviced? My guess is nothing. Why? Because there is no reason for anything to be left. Financing they are getting at the moment is not an attempt to develop a stable source of income. It is what's necessary to keep it afloat, because some believe "it has to stay afloat". Those who gave it money already have stable stream of income, it's called taxes.
I missed the bus to Foxwoods.