Tuesday, May 11, 2010

"Berkowitz’s Fairholme Increases Bet on AIG Recovery" as Some Analysts Question Results (AIG)

First up, Bloomberg:
Fairholme Capital Management, the investment firm run by Bruce Berkowitz, raised its bet on the recovery of bailed-out insurer American International Group Inc. by increasing holdings to 25.5 million shares.

The stake, disclosed today in a regulatory filing, compares with the 15 million AIG shares Fairholme reported as of March 31. Berkowitz, named the U.S. domestic stock fund manager of the decade in January by Chicago-based Morningstar Inc., has said he began buying AIG stock in the second half of 2009.

His firm’s stake, second in size only to the U.S. government’s, was valued at about $1 billion based on today’s closing price of $40.98 on the New York Stock Exchange. AIG has gained about 37 percent this year as Chief Executive Officer Robert Benmosche struck deals to sell two divisions for about $51 billion to help repay its bailout and posted a $1.45 billion first-quarter profit....MORE

And from Reactions:

Analysts sceptical of AIG’s Q1 results

Last week AIG reported net income of $1.5bn for the first quarter of 2010 compared with a net loss of $4.4bn in the first quarter of 2009. Despite the improvement, analysts remain sceptical about AIG’s ongoing recovery.

Last week American International Group (AIG) reported net income of $1.5bn for the first quarter of 2010 compared with a net loss of $4.4bn in the first quarter of 2009. Despite the improvement, analysts remain sceptical about AIG’s ongoing recovery.

According to Bill Bergman, senior analyst at Morningstar, the problem is the amount of the money that AIG owes relative to its capital – including government capital.

“They are still very thinly capitalised,” says Bergman. “If you look at the market capitalisation of the common equity relative to total assets, it’s just a sliver of total assets. And if you look at other relatively thriving institutions it is still significantly different.”

Bergman believes the market is still “very skittish and sceptical” about the long-term consequences to AIG’s common shareholders. It is possible the government is still facing some risk as well, he warns.

Cliff Gallant, analyst at Keefe, Bruyette and Woods, is unimpressed by the results, saying that the reported income is meaningless unless the benefits trickle down to the shareholders.

The reported adjusted operating income of $809m is “irrelevant”, says Gallant.

“They are not paying their series dividend and over the quarter they increased the amount of debt they owe to the federal government,” he told Reactions. “From my point from view the net income that they are reporting is not accruing to the common shareholder so to me it is a somewhat irrelevant figure.”

Gallant points out that over the course of the quarter AIG’s debt to the Federal Bank of New York and US Treasury actually increased. Gallant takes this as a sign that AIG is still very much dependent on the government to meet its liquidity needs. There is also a transfer of risk going from public equity owners of AIG to the federal government, he says.

He adds: “On the one hand you have a company that wants to say they are making money and financially stabilising but at the same time they are saying: ‘We can’t pay the interest we owe you.’ That’s not the degree of income, strength and stability that most people want to see from AIG.”

On a positive note, Bergman is encouraged by the performance of AIG’s general insurance operations of AIG. Chartis reported first quarter operating income before net realised capital gains of $879m compared with $710m in the first quarter of 2009, a 24% increase.

Chartis recorded also net premiums written of $7.6bn in the first quarter of 2010, a 1.1% decrease from the first quarter of 2009.

“The most important feature was the stabilisation of premium volume in their general insurance operations,” said Bergman. “That is going to be key to the company’s future viability and the ability to inspire customer and brokerage market confidence.”>>>MORE