American International Group, Inc. Thesis

American International Group, Inc. (AIG):

American International Group, Inc. (AIG) is a leading international insurance company
serving customers in more than 130 countries. AIG serve commercial, institutional, and individual customers through extensive worldwide property casualty networks. They are leading providers of life insurance and retirement services in the United States. AIG common stock is listed on the New York Stock Exchange and the Tokyo Stock Exchange.

American International Group, Inc. Valuation Summary:

AIG’s management has shown significant progress recapitalizing the company since the financial and credit crises. The path forward seems to be clearer now; events of the past few months shed additional light on overcoming the remaining hurdles:

  1. Ability to source significant cash to conclude restructuring.
  2. Treasury sales indicate a rationale approach to the disposition of their shares.
  3. Management’s is demonstrating prudent capital allocation under adverse conditions.

It appears a reasonable entry price is $40/share (or below) and at the current price of
$33.05/share yields a 42% margin of safety. An estimated intrinsic value of $60-70/share could be realized in a 3-5 year time frame. While we wait for the recapitalization to be completed, Earnings Power Value is improving although undefined at this time.

Background on What Happened to AIG:

AIG built global franchises in life and general insurance over the years and expanded
into a range of financial services businesses. AIG Financial Products Corp. (AIGFP) sold derivative products known as a credit default swaps; the main cause of AIG’s collapse. The swaps are insurance contracts on securities where AIG guaranteed the security’s value for a fee. If the price of the securities collapsed AIG was liable for the decline in price. A portion of the securities that AIG guaranteed were judged to be almost risk free and rated AAA by rating agencies. However, an estimated $61 billion in securities were exposed to
subprime mortgages through its swaps at the end of 2007.

The exposure to swaps wreaked AIG’s financial health in two ways. First, as the
U.S. residential mortgage market deteriorated the value of these securities declined and the company was forced to post mounting losses. At the time AIG assured investors these were paper losses, “unrealized losses,” under the belief they were temporary and would recover before AIG had to actually pay up and incur “realized losses.”  Second, AIG
was exposed to collateral calls because they agreed to provide additional collateral if the value of the securities fell or the company itself became a higher credit risk. All the above happened and in early 2007 AIG’s clients or counterparties began demanding additional collateral.

These events unfolded in earnest during 2008. AIG posted increasing amounts of
collateral and “unrealized losses” as the share price and book value of the company plummeted. From late 2007 to the end of 2008 AIG’s collateral calls increased from $450 million to $37.3 billion; cumulative unrealized losses increased from $354 million to $33.2 billion and the common stock share price dropped from $1163/share to about $28/share. The years 2007 and 2008 are illustrated in the chart below:

In a conference call with investors in late 2007 then CEO Martin Sullivan explained that the probability of AIG’s credit default swap portfolio sustaining an “economic
loss” was “close to zero” and later characterizing AIG’s risk modeling as “very reliable;” the transactions involved “conservatively structured.”  The swaps covering the CDOs (collateralized debt obligations) had an approximate value of $72 billion; the primary cause of AIG’s losses and collateral calls; with about $61 billion exposed to subprime

To stabilize AIG the Federal Reserve Bank of New York (FRBNY) extended an emergency loan of up to $85 billion on September 16, 2008. In addition the U.S. Department of Treasury (Treasury) received 79.9 percent equity ownership of AIG through preferred stock.

AIG and the FRBNY announced a comprehensive plan on November 10, 2008 to address AIG’s liquidity issues. FRBNY created two financing entities, Maiden Lane II and Maiden Lane III, to acquire AIG’s securities and the collateralized debt obligations that were guaranteed by AIGFP’s credit default swaps. Under the terms of the agreements, the majority of any appreciation in the securities held by the entities would go to the FRBNY, but a portion would be retained by AIG.

The Treasury also purchased through the Troubled Asset Relief Program (TARP), $40
billion of newly issued AIG perpetual preferred shares. The proceeds were used to pay down a portion of the outstanding FRBNY loan. The perpetual preferred shares carried cumulative compound dividends at 10 percent per year.

In total the government’s bailout approached $182 billion. AIG hired former MetLife Inc., Chairman and CEO Robert Benmosche as CEO in August 2009. Benmosche inherited a mess as the company continued to restructure itself, repay the government loans and move forward with plans to sell assets to raise money. Four priorities were identified:

  1. Strengthening international property & casualty and domestic life insurance businesses.
  2. Repay the U.S. government by divesting and monetizing appropriate assets.
  3. Reduce operating costs through a comprehensive review of AIG’s cost structure.
  4. Reduce excessive risk by winding down exposure to certain financial products and derivatives.

Significant Recapitalization Progress:

The January 2011 recapitalization of AIG laid out a path for the Treasury to monetize and exit its equity ownership stake over time.

AIG repaid the approximately $21 billion including $6.4 billion of accrued interest owed
under the Federal Reserve Bank of NY Credit Facility, which is now terminated.

The company retired approximately $6.1 billion and purchased the remainder (approximately  $20.3 billion) of the FRBNY’s preferred interests in the two special purpose vehicles (SPVs) that held AIA and ALICO and transferred the purchased portion of those interests to the Treasury Department in the recapitalization.

The Preferred Shares previously held by the Treasury Department and the AIG Credit
Facility Trust were exchanged for approximately 1.655 billion shares of AIG common stock or 92% of the total outstanding common stock of AIG immediately after the recapitalization held by the Treasury.

The chart below summarizes the progress and further detail provided here.

Source: AIG

More specifically to the AIG Financial Products, the division cited at the center of the
company’s crises, significant progress has been made unwinding the troublesome positions. Since 2008 Financial Products legacy derivatives have been reduced 90% through 2011, from $1800 billion to $176 billion.

From AIG’s The Winding Down of AIG Financial Products:

And from AIG’s 4Q 2011 conference call presentation:

Source: AIG 4Q 2011 Conference Call Presentation

On March 8, 2012 the U.S. Treasury Department sold 207 million of their AIG shares and the company purchased half or about 103.5 million at $29/share or about $3 billion. At a book value of $55.33/share the purchase was made at 52% of book value. This is an outstanding allocation of capital for existing shareholders buying $1.00 of assets for $.52. The sale reduced the government’s holding of AIG common stock to 1.25 billion shares or about 70% down from 77% before the sale and 92% in early 2011.

AIG will also fully repay the government’s remaining $8.5 billion preferred interest in
another vehicle that was collateralized by AIG’s portion of AIA Group Ltd.  Funds for the transaction will come from the sale of a portion of its stake in AIA that closed the same day. The Treasury said its investment in AIG is reduced to $37.8 billion.

The FRBNY has an outstanding $9.3 billion loan to an investment vehicle known as Maiden Lane III formed to absorb AIG’s then toxic assets. The loan is collateralized by assets that are now worth well more than the outstanding loan.

In late February AIG said it was freeing up tax credits it had accumulated during the financial crisis to use the tax benefit because management now believes AIG is likely to
report sustainable profits in the future.

Company Profile:


Where things now stand with AIG:

Insurance companies are closely regulated and by law their reserves are protected with adequate assets to meet obligations. AIG’s core insurance businesses continued to be healthy and well capitalized aside from normal operational variances to be expected. AIG did incur large catastrophic losses in 2010 and have provided for them.

AIG reported 4Q 2011 results on February 24, 2012 and it was hard not to feel the optimism during the conference call. Robert Benmosche AIG’s President and CEO started off “…we’re going to talk a little bit about 2011 and think about where you were a year ago…When we started the year off we had the whole recapitalization of AIG with the Federal Reserve and U.S. Treasury and many of you said I don’t [think] they can make it….and by the way we were three years early for what it is we were required to do at that point in time, but in fact we closed in January of 2011.”  Later he added: “So, net to us the fourth quarter is a clear demonstration that this Company has not only survived, it’s got its strength, it’s got its key people, and we’re moving in the right direction and we’re going to continue to build value for our clients, for our shareholders, and have a great place for our employees to thrive in.” Chief Financial Officer David Herzog later commented during the call: “It signifies our view that we have returned to sustainable profitability.”  The conference call and supporting documentation can be found in its entirety here.

Is the optimism warranted? I believe so (and with good company). It forms the basis of our investment thesis.

Investment Thesis:

Management’s demonstrated progress clarifies, in my view, a viable path forward for AIG. This progress and recent events shed light on unanswered questions:

  1. Ability to source significant cash to conclude restructuring.
  2. The recent Treasury share sale shows a rationale approach to the disposition of their shares.
  3. Management’s is demonstrating prudent capital allocation and good judgement under adverse conditions.

Remaining sources of cash for continued restructuring:

AIA Group LTD (AIA):

On March 8, 2012 AIG sold part of its 3.96 billion share stake in the Hong Kong based subsidiary for $6.0 billion reducing the stake from 33% to 19%. This implies a remaining value of $8.1 billion to be realized by AIG. There is a 180 day lock up before the remaining sale can occur unless released early by the underwriters. Bloomberg reported on the transaction here

Maiden Lane III

Maiden Lane III LLC was formed during the bailout to purchase the CDOs in order to place a cap on AIG’s collateral payments for these derivatives. After the recent successful
sale of Maiden Lane II and improving market conditions the FRBNY is considering the sale of Maiden Lane III. Maiden Lane III assets consist of $29.3 billion in collateralized debt obligations from certain counterparties of AIG Financial Products and AIG has $5 billion of equity in the portfolio which is accruing interest. The company is also entitled to a third of the profits after the FRBNY loan that funded Maiden Lane III is repaid. AIG recorded Maiden Lane III at a fair value of $5.7 billion as of 12/31/11; estimates are $7.0 billion could be generated for AIG if done today. Reuters discusses the potential sale here.

International Lease Finance Corp (ILFC)

ILFC is the world’s largest independent aircraft leasing business owned by AIG with a book value of $7.5 billion. AIG has identified ILFC as a non core asset held for sale. A U.S. Securities and Exchange Commission (SEC) S-1 filing for ILFC was made in September, 2011. Form S-1 is a registration of securities with the SEC in anticipation of a public securities offering. Last month Treasury covenants restricting the sale were lifted. AIG is apparently considering a spinoff of ILFC. There is a wide valuation range reported, from $3 billion to $8.0 billion, but the company seems willing to wait for a “fair” price. AIG’s fair price is not disclosed but in the 4Q 2011 earnings conference call, $7.5 billion was used by management in an IPO comment.

On April 4, 2012 CNBC reported that a partial IPO of ILFC as early as the 2Q 2012 is being considered by AIG. The sources are not named so the credibility of the report may be questioned. An initial sale of 50% of IFLC with an eventual total value in the range of $6-8 billion is reported.  The video report is here.

Dividends from Chartis and SunAmerica

During the 4Q 2011 conference call AIG management said $4-5 billion annual dividend
payments are expected from ongoing operations of these two core units. This is up significantly from 2011 due to the high catastrophe experienced that year.

Corporate Cash

At year end AIG retained $9.8 billion in cash and short term securities at the corporate or holding company level.

The investment thesis is simple:

  1. AIG and the U.S. Treasury interests are fully aligned.
  2. Recent developments show a prudent action can be expected from both parties.
  3. The share buybacks at a fraction of book value without increasing debt will continue.
  4. Significant funds will be available to continue expeditiously.
  5. AIG will be a smaller, profitable company with a focus on risk.
  6. Management will restore investor confidence under the leadership of CEO Robert Benmosche.

Bruce Berkowitz, Morningstar’s fund manager of the decade, has made a large investment in AIG. He has been a strong vocal advocate of AIG’s value in the face of much criticism. His investment case here is compelling.  It’s nice to be in good company.


It is believed AIG is a compelling investment opportunity for the above reasons.
Although the timing is uncertain it appears highly likely that the recapitalization will be accomplished sooner rather than later; in any event well within our usual 3-5 year investment horizon.

Key Assumptions:

  1. All non-core business sales will be completed by year end 2013.
  2. Timing of asset sales and Treasury stock sales will be sooner than most realize.
  3. AIG will purchase 50% of Treasury’s common stock as it becomes available.
  4. It is in the Treasury’s best interest to sell consistent with AIG’s ability to buy shares.

Net Asset Value (NAV):

Net Asset Value or book value is a term referring to the sum of all of a company’s assets minus its liabilities. It is reflected on the balance sheet as shareholders’ equity. Because the assets and liabilities exist today and are tangible they can be measured with more precision than future earnings.

This is especially true with AIG’s balance sheet as of 12/31/11 and summarized in the table below. No adjustments were made as the balance sheet has been through rigorous reviews and validations as a result of the bailout.  Reviewers include Special Inspector General TARP; Controller of the Currency; Department of Treasury; NY Dept. of Financial Services; U.S. Federal Reserve; U.S. Securities and Exchange Commission; U.S. Dept. of Accountability; and from an investor’s perspective Bruce Berkowitz of the Fairholme Fund.

Based on this Net Asset Value the first intrinsic value estimate for AIG is:

Share Buybacks will be Accretive to Book Value:

AIG management is buying back shares of common stock now trading significantly below tangible book value. It is assumed this well continue because: 1) The buyback of shares at a fraction of book value will increase the book value for remaining shareholders including management’s personal holdings; and 2) It supports AIG share price as the Treasury disposes its huge holdings; enabling the government to show a profit from the politically controversial bailout.

A summary of funds available from asset sales and ongoing operations (subsidiary dividends) is below. Since the timing of asset sales is unknown they were assumed to occur about equally over the remainder of 2012 and 2013. The timing of any particular sale will not change the investment theme significantly.

The price of the share purchases are also unknown, however we know Treasury is willing to sell at $29/share based on the recent sale. This sale was done at about .52X YE 2011 book value of $55.33/share. As investors see the orderly sale process by Treasury and buyback of shares by AIG share prices are likely to strengthen.

Two cases were analyzed:

Case I: AIG buys back 1/2 of all Treasury shares sold at a price of 60% of book value per share and retire the shares. As shares are retired book value rises and therefore share price increases accordingly through the buybacks.

Case II: Similar to Case I where AIG buys back 1/2 of all Treasury shares sold but at a price of 70% of book value per share for the remainder of 2012 and at a price of 80% of book value per share during 2013 and 2014.

A summary of the results for the two cases are shown in the tables and graphs below:

The share buybacks will have a significant impact on book value in both cases. In Case I where the share price remains lower longer, at 60% of book, the purchases are more accretive resulting in an estimated book value per share of $77.98 when complete and all other things being equal. Case II is the more conservative case as the share price rises sooner and it takes longer to acquire the remaining shares resulting in a book value per share of $67.66. Neither case will be exact but brackets a reasonable estimate of the increase in value.

S&P industry average price to book value ratio for property and casualty insurance companies’ is 1.1 and life insurance companies is 1.2. Although the industry is still recovering from the financial crises it seems reasonable that over time these multiples will
return. As investors regain confidence in AIG and Treasury’s prudent disposition of shares, share price should approach book value. So even without the the buybacks, AIG appears to be a bargain.

Following is the estimate of intrinsic value and margin of safety:

Earnings Power Value (EPV):

Earnings Power Value is an estimate of the company’s value calculated from free cash flow derived from ongoing operations with no credit given for cash flows anticipated from future growth. EPV assumes that current cash flows are sustainable and future growth is assumed to be zero. EPV will be determined for AIG after the balance sheet recapitalization is completed and a better basis for ongoing cash flow is available. EPV in my view is premature at this time. The above Net Asset Value, third party review,
prudent Treasury actions, and AIG’s accretive buybacks provide sufficient basis IMO for the investment thesis.

Reasons to Consider this Investment:

AIG’s $182 billion bailout by the government is often used as an example of the financial crisis and its cost. It was the biggest corporate bailout in history and at times involved elements of risk and deception. The complicated bailout raised moral issues around financial institutions, obligations to shareholders, employees and ultimately the public.
Too big to fail is still a hard pill for many of us to swallow. At the time difficult choices had to be made quickly by policy makers creating this investment opportunity.

That was then and what we have now is a company with new management, thoroughly reviewed and scrubbed, under U.S. government stewardship and support. They are demonstrating the wherewithal to survive and making prudent decision during the recapitalization. That is what value investing is about; buying businesses when they are on sale because they fell out of favor or make mistakes from which they can learn and recover. How long they remain out of favor is unknown and we need to buy before the sale is over.
Buy when others are fearful, sell when others are greedy.

AIG should be considered for investment now because:

  1. The new management team led by CEO Robert Benmosche has performed remarkably well given the mess they inherited; a track record of performance is established.
  2. AIG’s business has been reviewed by countless third party regulators, auditors, and investors. My bet is no stone is left unturned.
  3. The last remaining uncertainties are being eliminated around asset sales, values, Treasury’s disposition of shares, and through management’s openness and honesty with stakeholders.
  4. AIG still trades at about 1/2 of tangible book value and will likely increase to 1x book value.
  5. Recent actions by AIG management and Treasury show a rationale and prudent path to increasing tangible book value.
  6. It’s hard to be in better company on financial investments than Bruce Berkowitz, Morningstar’s Manager of the Decade, who has a huge investment in AIG.


  1. AIG will likely be designated a Systematically Important Financial Institution (SIFI). A SIFI may pose systemic risks to the world economy and under the Basel 3 framework may be subject to enhanced capital requirements. AIG’s management has provided for this possibility but there is no assurance provisions are sufficient.
  2. Assumptions on the timing, value, and use of funds from assets sales may not be accurate; they are only assumptions.
  3. AIG is subject to various regulatory reviews in a number of jurisdictions, any of which could result in cash flow reductions and other adverse changes.
  4. As a global company AIG is exposed to foreign exchange risk, interest rate risk, global economic conditions and other material impacts that could adversely affect the business.
  5. AIG will be a smaller company on completion of the recapitalization and may not be as competitive as before.


I am long AIG and will be buying more shares in the near future.

The information contained herein is provided for informational purposes only, is not comprehensive, does not contain important disclosures and risk factors associated with investments, and is subject to change without notice. The author is not responsible for the
accuracy, completeness or lack thereof of information, nor has the author verified information from third parties which may be relied upon. The information does not take into account the particular investment objectives or financial circumstances of any specific person or organization which may view it. Nothing
contained within may be considered an offer or a solicitation to purchase or sell any particular financial instrument. Any investment can be very risky and is not suitable for everyone. You should never enter into an investment unless you can afford to lose your entire investment. Always complete your own due diligence. Before making any investment, investors are advised to review such investment thoroughly and carefully with their
financial, legal and tax advisors to determine whether it is suitable for them.

Copyright © 2012 Provalum LLC. All Rights Reserved.



  1. Great article and after the last 2 days of declines based on the jobs report, I’m going to start tip-toeing into the world of insurance. Thank you for the insight and obviously painstaking research. Very nicely done.

    • Eric, thank you for the kind words and glad you enjoyed it. If AIG plays out the way we hope; this may be the only way we get a tax refund on our bailout money. 😉

  2. thanks , George.

    I just found your site ,but will continue to follow you
    based on your great insite on aig.I have been hoping it would
    shoot up but now hope aig can repurchase more shares before
    it does.very inciteful.

    • Thank you for the kind feedback Rich. Glad you found the site useful and will continue following.

      If AIG doesn’t do all the share buybacks we are hoping for that means they likely found an even better investment alternative for the cash. Its nice to have downsides that appear this attractive! 🙂

  3. Now that the treasury has sold shares in the public market, how does this impact AIG for purchasing the remaining treasury shares and reinstating a dividend?

Speak Your Mind