When Losing $8.9B Constitutes a Major Improvement

“Let’s talk about AIG…The Treasury Secretary Tim Geithner, a couple of weeks back Geithner said this about AIG. He said, the situation of AIG today is substantially better than it was six or 12 months ago. AIG’s insurance subsidiaries are open for business and generating positive returns.

Fast forward to today, the stock’s down nearly 9% and the insurer, the very face of government bailouts posting an $8.9 billion loss saying it may, in fact, need more of the government’s money…” –CNBC’s Power Lunch 2/26/2010

After majority taxpayer-owned American International Group (AIG) reported another horrendous quarter, there was understandably a fair amount of indignation from the financial media. Just a few weeks ago, Tim Geithner did his best impression of an equity analyst in saying essentially that AIG’s prospects are improving. Technically speaking, he was not wrong as AIG posted a loss of only $8.87 billion compared to the historic loss of $61.7 billion a year ago.

Improvement from the worst quarter in US corporate history should not be a surprise. Shares of the insurance giant are trading nearly 10% lower on Friday in response to the mounting losses and headlines about possibly requiring further government assistance. Although it may dismay investors that AIG is not entirely sure about its ability to stand alone, it is nothing new concern according the CEO.

In the quarter, AIG did add about $1.8 billion to boost reserves for property-casualty issuance, which may suggest they are not yet out of the woods. The adjusted operating net loss figure comes out to about $7.2 billion or $53.23 per share, roughly double the company’s market capitalization coming into the day. Estimates from Wall Street analysts had called for a much narrower loss of under $4 per share on average.

Interestingly, AIG has made an about face on their plan to repay the New York Fed the approximately $100 billion it still owes. Formerly, the plan was to pay back the taxpayer from the cash flow of life insurance premiums, but CEO Robert Benmosche now says that will not be necessary as he hopes that asset sales and other sources of income will be sufficient to repay its debt. General economic improvement and a loosening of capital markets have made some of AIG’s units more attractive to buyers. There are two key restructuring plans that are already underway; selling its American Life Insurance Company (aka ALICO) to MetLife (MET) for around $15 billion and a planned spin-off and IPO of its American International Assurance group. However, we could not imagine these two moves alone coming anywhere close to the necessary total.

At this point, I could delve into the results from some of AIG’s business lines and talk about specifics on their asset sales, but digging through the complex morass would be a waste of time. AIG’s results are improving for two reasons. First, it could not get any worse, but also it is because the economy has perked up which enables a smoother restructuring. Recently, AIG has unloaded assets as well as a substantial portion of its derivatives business. However, they are selling off their most attractive and profitable units in an effort to make taxpayers whole on their bailout. What the earnings potential of the remaining units will be is anyone’s guess, and the company readily admits that it may need further assistance if there are more bumps in the road. While AIG’s restructuring continues, the stock should be left to speculators because there is still almost no visibility into whatever does eventually emerge.

AIG: When Losing $8.9B Constitutes A Major Improvement

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

Ockham Research provides its research in a variety of forms and products including our company specific reports, portfolio analytics tools, newsletters, and blog posts. We also offer a white labeling research solution that can give any financial services firm their own research presence without the time and cost associated with building such a robust coverage universe of their own.

Be the first to comment

Leave a Reply

Your email address will not be published.