Thursday, May 27, 2010

Why American International Group Can't have it Both Ways (AIG)

The stock is trading up 88 cents at $34.93, pre-market. We have a serious interest in this one, links below.

AIG is finding it hard to convince people that everything is fine at its insurance units while making slow progress on reducing its obligations to the government.

You made a $1.5bn profit? Big deal.

That is the attitude many are taking towards American International Group (AIG)following its first-quarter results. The slowly-recovering, government-backed insurer reported net income of $1.5bn for the first quarter of 2010, a reverse from a net loss of $4.4bn in the first quarter of 2009. Despite the improvement, analysts remain sceptical about AIG’s recovery.

For example, 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.

“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 caused AIG’s share price to drop 6% on April 27 after he released a report saying there is little long-term value in AIG’s shares under its ownership structure and that the shares are grossly overvalued.

Other analysts Reactions has spoken to point out that AIG remains extremely thinly capitalised. This means the market is very skittish and skeptical about AIG’s long-term prospects.

Others are more bullish, however. In May, Fairholme Capital Management increased its holding of AIG shares to 25.5m shares from 15m shares as of the end of March 31.

But I am not so sure anybody truly understands the endgame here. This is an extraordinarily bizarre situation that the insurance market has not seen before.

Following fellow US insurer The Hartford ridding itself of its debt to the government earlier this year, AIG is now the only insurance firm still being propped up with government funds. AIG is in an incredibly awkward position.

According to Gallant: “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.”

Therein lies the problem.

AIG wants to have its government-bought cake and eat it too. It has to adopt a bullish, hard-nosed business attitude of fighting to keep its business and saying everything is fine while also remaining propped up by the taxpayer. Its recent sales of AIA and Alico will help a lot, but it may still take another two or three years for the government to get out of the insurance game and it is far from clear it can do this without the taxpayer making a great loss....MORE

Yesterday Bloomberg had an interesting piece that looked at some of the same issues:

AIG’s Benmosche Says Taxpayers Will Get Money Back
American International Group Inc. Chief Executive Officer Robert Benmosche told a congressional panel the firm is “on a clear path” to repaying taxpayers, while the committee’s chairman said the bailed-out insurer may need to weigh putting units in bankruptcy.

AIG will repay a Federal Reserve credit line after deals to divest two units for about $51 billion are completed this year, Benmosche said in remarks submitted to the Congressional Oversight Panel. The insurer will then turn to repaying Treasury Department obligations, he said. AIG is committed to selling its AIA Group Ltd. to Prudential Plc, Benmosche said.

“We are well on our way to remaking AIG into a more streamlined and focused company,” Benmosche, 66, said in the testimony. The insurer is “less reliant on government aid and has been able to instead tap the capital markets. AIG is now on a clear path to repaying taxpayers.”

Benmosche is testifying today before congressional overseers in Washington for the first time since joining AIG in August. The panel was created to oversee the Troubled Asset Relief Program, which helped fund New York-based AIG’s $182.3 billion rescue. Benmosche has told employees he would delay asset sales until he received fair prices, a strategy which has begun to reap gains, he said today.

AIG “faced pressure from multiple stakeholders to quickly sell assets to show progress,” Benmosche said. “I knew that this was not the best course of action and could never result in the successful repayment of taxpayers.”

‘A Faster Pace’

The oversight panel is led by Harvard University law professor Elizabeth Warren, who earlier today questioned Benmosche’s approach by saying that the U.S. may need to weigh putting AIG units into bankruptcy. She didn’t specify which units could be candidates.

“Maybe some of them need to go through bankruptcy, and really reorganize it at a faster pace,” Warren told CNBC before the hearing. “We at least want to talk about that and hear the government explain what its view is.”>>>MORE

Some of our posts on the broken behemoth:

"Calculating A.I.G.’s Big European Exposure" (AIG)

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

"AN INTERVIEW WITH BRUCE BERKOWITZ: Why the Fairholme founder finds AIG, Bank of America and Citi very attractive now." (AIG; BAC; C)

"AIG Is ‘Grossly Overvalued,’ Lowered to ‘Underperform’ by KBW"

More on the KBW Downgrade of AIG (and $6.00 price target) AIG

"After shorting subprime, Eisman says short AIG" (AIG)

"Geithner Talks Up Citigroup Exit, Fannie, Freddie, AIG" (AIG; C; FNM; FRE)
Now that's a portfolio!

"At AIG, What Is Left to Sell?" (AIG)

"AIG Gets The Dreaded "Going Concern"

"Greenberg sells AIG stock to UBS for $278 million"

How's That "Short AIG Working Out?"

"Back-month bears bet on an extended slide for the insurance issue" (AIG)
In our September 1, 2009 post "American Intl Group: Downgraded to Underperform at Sanford Bernstein; $10 target (AIG)" I said:
In early pre-market trade the stock is down $2.23 (4.92%) at $45.33. If SB is correct that leaves some downside, eh?...
We followed up with:
Sep 9
Credit Suisse Analysts on AIG: ‘Little to No Value for Common Equity’
Sep 22
AIG Shares: Still Not Worth Anything.
Nov 30
American International Group: AIG Reserves Deficient - Sanford Bernstein (AIG)
Dec 1
AIG Tangible Common Equity -$162.06 a Share, Analyst Says (AIG)
Dec 4
"Trading Idea: Sell AIG" (AIG)