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American International Group: Upside in Turnaround

By    |   Tuesday, 17 July 2012 05:57 PM

American International Group (AIG), the global poster child of the credit crisis, seems to have gotten back on its feet financially. And while the U.S. government continues to hold a significant portion of the insurer’s shares, it is divesting bit by bit. Analysts, while they see risk, also see upside as the turnaround plan is enforced.

American International Group is a leading international insurance organization serving customers in more than 130 countries. AIG companies serve commercial, institutional and individual customers through one of the most extensive worldwide property-casualty networks of any insurer. In addition, AIG companies are leading providers of life insurance and retirement services in the United States.

In September 2008, liquidity issues resulted in AIG seeking and receiving governmental support through a credit facility from the Federal Reserve Bank of New York (FRBNY) and funding from the United States Department of the Treasury through the Troubled Asset Relief Program (TARP).

On Jan. 14, 2011, AIG was recapitalized and the FRBNY Credit Facility was repaid and terminated through a series of transactions that resulted in the Department of the Treasury becoming AIG's majority shareholder with ownership of approximately 92 percent of outstanding AIG Common Stock at that time.

“AIG understands that, subject to market conditions, the Department of the Treasury intends to dispose of its ownership interest over time, and AIG has granted certain registration rights to the Department of the Treasury to facilitate such sales,” management said in a recent filing.

On May 27, 2011, AIG and the Department of the Treasury, as the selling shareholder, completed a registered public offering of AIG Common Stock. AIG issued and sold 100 million shares of AIG Common Stock for aggregate net proceeds of approximately $2.9 billion and the Department of the Treasury sold 200 million shares of AIG Common Stock. AIG did not receive any of the proceeds from the sale of the shares of AIG Common Stock by the Department of the Treasury.

As a result of the sale of AIG Common Stock in this offering, the Series G Cumulative Mandatory Convertible Preferred Stock, par value $5.00 per share (the Series G Preferred Stock) was cancelled and the ownership of the outstanding AIG Common Stock by the Department of the Treasury was reduced from approximately 92 percent to approximately 77 percent after the completion of the offering. In a later filing, AIG reported the number had fallen to 70 percent.

American International Group has a market cap of $56.12 billion in a sector, insurance, where the average company size is $12.62 billion. Its trailing 12-month P/E ratio is 2.83 and its five-year projected price-to-earnings-growth (PEG) ratio is 0.14, compared to 3.26 for the sector.

Its projected earnings per share growth for the coming year is negative 10.25 percent, compared to a sector average of 8.76 percent.


Analysts are generally positive on AIG, with buy or outperform calls from Sandler O’Neill, Goldman Sachs, Standard & Poor’s Equity Research, William Blair & Company, Deutsche Bank, and B.P. Bernstein.

“We view the shares as undervalued versus peers and historical averages, particularly on a price/book basis,” S&P analysts wrote on May 8 when the stock was at $31.70.

“We caution that a high degree of execution risk remains in AIG's turnaround strategy, although we believe AIG has made considerable progress. In our view, AIG's financial situation has also improved, but challenges remain.”

American International Group next reports on Aug. 2.

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Tuesday, 17 July 2012 05:57 PM
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