Description

AIG currently trades at 62% of stated tangible book value (55%, if you include $6 per share in DTA), and roughly 8-10x normalized earnings.  AIG is 77% owned by the US gov and 23% owned by traditional public shareholders.

            AIG nearly went bankrupt in September 2008 due to a liquidity crisis caused by collateral requirements on written cds and a securities lending portfolio heavily invested in mortgage securities.  A downgrade of the firm’s credit rating resulted in 20-50bn of collateral requirements that AIG did not have the liquidity to meet.  The US government  funded the firm’s liquidity needs and  took a preferred and rights to 80% of the common.  AIG’s bailout was restructured multiple times and largely paid off through asset sales. 

AIG has greatly simplified it operations over the past 3 years. Today, AIG is a holding company with 4 operating businesses and a collection of non-core assets.  Exposure on the derivative portfolio has been reduced 97% and AIG is overcapitalized in all of its subsidiaries.  AIG now has 4 main assets: Chartis, SunAmerica, ILFC, and UGC – each of which are managed on a stand alone basis.

            Chartis is AIG’s P&C business, the business is roughly 50/50, US vs. RoW (based on net written premiums).  Chartis’ international business is rather good, producing sub 100 combined  ratios over the past 10 years.  Chartis’s US business is terrible, taking significant reserve charges in 3 of the past 4 years and producing the worst underwriting results of any major P&C company over the past 10 years.  Chartis is a turn around effort and under a new CEO, peter hancock.  Hancock is new to the p/c industry and is completely unimpressive in his views about the industry. There are very legitimate concerns regarding the quality of chartis' reserves.

SunAmerica is a leading life insurance business with particular strength in the k-12 education market and fixed annuities.  Unfortunately, life insurance is a difficult business and SunAmerica can not earn more than 8-10% on unlevered equity.

ILFC is the 2nd largest aircraft leasing company in the world, but it has a number of older planes.  Retirement of older planes will constrain ILFC's earnings power over the next 5 years.

UGC is the 3rd largest mortgage insurer in the US and has returned to profitability after losses caused by the recent US mtg. crisis.

AIG also has $6 per share (NPV) of deferred tax assets that will be recognized as the company demonstrates earnings power.

Putting it together, none of AIG's businesses are very good, but the stock is very cheap.  The US gov. stake is an overhang, but also a potential catalyst -- should AIG trade at a reasonable level, the gov will sell -- if not, they might start to sell of the pieces.  Should AIG trade in line with industry peers, the stock would be between $38-45.  The significant discount coupled with AIG's pre-tax earnings power means that AIG can afford to strengthen reserves at chartis for each of the next two  yeas (use all earning) and share holders can still do ok (+30-60% over 2 years) if AIG is rehabilitated over that time.

Catalyst