The U.S. Treasury's decision to sell around $18 billion of its
AIG (
AIG
) stock on Tuesday, 11
th
September came shortly after the company announced its $5 billion
plan for buybacks from the Treasury. (See
AIG To Fund Repurchase With AIA Sale
for more details on the plan) The Treasury's sale included an
offering of 553.8 million shares of AIG's common stock at price of
$32.50 per share. The global coordinators for the deal are
Citigroup, Deutsche Bank Securities Inc., Goldman, Sachs & Co.,
and J.P. Morgan Securities LLC while Merrill Lynch, Barclays
Capital Inc., Morgan Stanley & Co. LLC, RBC Capital Markets,
LLC, UBS Securities LLC, Wells Fargo Securities, LLC and Credit
Suisse Securities (
USA
) LLC will act as joint book runners.
The sale would reduce the Treasury's stake in the company from
53.4% to 15.9% as the underwriters involved have exercised their
option to purchase an additional 83.1 million shares for $2.7
billion. We look below at the effects that the deal could have on
AIG in the future.
Check out our complete coverage of AIG here
The Story So Far
AIG's affair with the government began in 2008, when the company
suffered a severe and sudden liquidity crisis as credit default
swaps written by AIG Financial Products Corp. (AIGFP) plummeted in
value, leading to a downgrade in the company's credit rating and
making the company insolvent. As a result, the Federal Reserve Bank
of New York (FRBNY) created a secured credit facility to enable AIG
to meet its obligations. The total support received from the U.S.
government eventually reached $182 billion, with the Treasury
Department holding 92% of the company's total outstanding common
stock. This was the largest bailout received by a private company
during the financial crisis.
Facing public anger, AIG undertook a plan to restructure its
operations to repay loans from the government. The plan included
the divestiture of non-core assets such as Japan-based life
insurance subsidiaries, AIG Star Life Insurance Co., Ltd. and AIG
Edison Life Insurance Company, which were sold to Prudential
Financial (
PRU
) in 2010. AIG also sold American Life Insurance Company (ALICO) to
MetLife (
MET
) for approximately $16.2 billion and 67% of its stake in American
International Assurance (
AIA
) through an initial public offering in October, 2010.
The cash proceeds generated from the sales as well as sales of
other assets like American General Finance Inc. (AGF) and AIG
Finance (Hong Kong) Limited were used to repay the FRBNY credit
facility in full. Through a series of stock sales AIG reduced the
Treasury's ownership from 92% to 53.4%. The last of the Treasury's
sales came in August involving a sale of $5.75 billion worth of
shares for a price of $30.50 per share. AIG bought back shares
worth $2.0 billion, with shares worth $3.0 billion sold in the open
market and $750 million sold to the underwriters.
AIG has also wind-down its derivatives portfolio from
investments of $1,800 billion in 2008 to $190 billion at the end of
2011, greatly reducing risks to prevent a future disaster.
But What Does It Mean For AIG?
Following the bailout, AIG decided to restructure operations to
focus on its international property and casualty and U.S. life
insurance and retirement businesses. In a mature market like the
U.S., where competition is stiff and most companies are offering
similar products, brand image is an important factor influencing
the sales of a product. Needless to say, AIG's brand image suffered
a massive blow in 2008, following the financial collapse. Public
anger against the company reached a peak in 2009 when AIG announced
plans to allocate $1.2 billion for employee bonuses, including
$165 million in executive bonuses. Furore ensued as the
general public as well as politicians including President Barrack
Obama questioned the company's decision to use the tax payer's
money to pay unwarranted bonuses to executives. Edward Liddy, the
CEO at the time, eventually resigned following in part due to this
PR debacle.
To assuage the public, AIG announced that it would repay the
debt it owed to the American public and would regain its trust. So
far, it has come good on its promise as the government has made a
profit of around $15.1 billion through the sales of the company's
shares. Further sales of the Treasury's stake are expected to add
to the profit the government will generate. The company has also
recovered America's trust, earlier this year, Chief Executive
Officer, Robert H. Benmosche announced that the property and
casualty division, Chartis, which was renamed from AIU Holdings LLC
following the crisis to distance it from the parent company, would
once again use the AIG name. (See
AIG Is Ready To Use Its Own Name Again For P&C
Business
for more details)
AIG currently markets life insurance and retirement solutions in
the U.S. under the name "SunAmerica". Last year, it started selling
life insurance in the country, using the name AIG Direct and
received positive response. The company has increased sales of
equity-linked variable annuities even as competitors such as
MetLife are cutting back on the product to reduce market exposure.
Variable annuities have been quite popular among the American
public and increased focus on the product allowed AIG to increase
market share from about 4.5%, in 2010 and 2011, to 5.7% in the
first half of 2012. Annuity sales during the period increased by
over 20%, year-on-year.
Apart from brand image, distribution is the main key factor
determining the sales of an insurance product. AIG has established
an effective distribution network that includes banks, national,
regional and independent broker-dealers, affiliated financial
advisers and independent and career insurance agents. To augment
this network, AIG recently acquired broker-dealer, Woodbury
Financial from industry peers, Hartford Financial Services Group,
adding 1,400 financial advisers to its network.
We believe that effective distribution and an improvement in
brand image will boost sales of AIG's life insurance and retirement
products in the future.
We believe that AIG is fairly valued as our $35 valuation of the
AIG's stock is in-line with the current market price. You can gauge
the effects of a change in forecast, by modifying the graph shown
above
Submit a Post at Trefis Powered by Data and Interactive
Charts
|
Understand What Drives a Stock at Trefis