Has AIG Managed to Get Itself Back on Track?
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American International Group's (NYSE: AIG) bailout worked well and the government and shareholders can claim hearty returns for now. I wonder what a Lehman Brothers bailout might have looked like, but it looks like AIG has managed to get itself back on track. This means the company is on solid footing. The Federal Reserve and the US Treasury not only rescued it from bankruptcy but also reported a profit on its four-year investment and has recovered a total $197.4 billion from the company. That's all of its original investment of $182.3 billion plus a return of $15.1 billion to taxpayers. The sales cut the government's stake in AIG to 15.9% from 53.4%. AIG's stock is up more than 40% since January.
AIG was significantly and adversely affected by the market turmoil in late 2008 and early 2009 and recognized other-than-temporary impairment charges in 2008 primarily related to collateralized mortgage-backed securities, other structured securities and securities of financial institution. The Federal Reserve Bank and the United States Treasury had increased the potential financial support to AIG, with the support of an investment of as much as $182.3 billion. AIG subsequently sold a number of its subsidiaries and other assets to pay down loans received, and continue to seek buyers of its assets.
- Businesses are on track and sales are strong. AIG has shown stark improvement in its financial results so far in 2012, given lower catastrophe losses, reducing interest expenses and superior performance from its primary businesses – Chartis and SunAmerica. For the first six months of this year, revenues are up 10.7%. At the end of June, the company had nearly $1.2 billion in cash on its balance sheet.
- For the second year in a row AIG posted a profit and demonstrated sustainable earnings. At year-end 2011, net income was up a huge 250% since December 2009. Even stripping out gains from the release of deferred tax asset valuation allowance, AIG earned more than $1.2 billion in 2011. AIG has the largest shareholders’ equity of any insurance company in the world. Total shareholders' equity has risen to $105 billion in 2011, compared to $85.3 billion in 2010.
This chart shows how the revenues have increased over the last three years after the crisis in 2008 and how it has managed to generate positive net incomes in the subsequent growth period afterwards.
- AIG’s consistent deleveraging and restructuring efforts, taken over the past few years, have started showing positive results. The ratings agencies also appear quite optimistic about the company’s core earnings and underwriting profitability for the rest of 2012. S&P affirmed its long-term counterparty credit rating of “A-” on AIG. Additionally, its senior unsecured debt, subordinated debt and junior subordinated debentures were affirmed at “A-”, “BBB+” and “BBB”, respectively.
- Even AIG’s return on assets (ROA) for the year-end 2011 stands at 3.33%, better than 2.15% of Allianz SE (ALV.DE), 1.8% of ACE Limited (NYSE: ACE), 0.93% of American Financial Group (NYSE: AFG), and 0.88% of American National Insurance Company (NASDAQ: ANAT).
- By December 2010, AIG completed the sale of ALICO to MetLife (NYSE: MET) for approximately $16.2 billion and issued an IPO of AIA of about $20.51 billion. By January 2011, the total cash proceeds of $26.9 billion were used for the full repayment of the liability to the Fed.
- On January 14, 2011, AIG was recapitalized and the FRBNY Credit Facility was repaid and terminated through a series of transactions that resulted in the Department of the Treasury becoming AIG’s majority shareholder with ownership of approximately 92% of outstanding AIG Common Stock at that time.
The largest business segment Chartis comprises of the Commercial and Consumer Insurance. AIG reorganized Chartis in 2011, property and casualty division, and its new global structure better aligns consumer and commercial capabilities with the needs of customers. In 2011, Commercial Insurance and Consumer Insurance represented approximately 62% and 38%, respectively of Chartis total net premiums written. The results over the last year show strong growth.
The second largest business segment is SunAmerica Financial Group, U.S. life and retirement business, is an industry leader helping customers meet the increasing challenges of financial and retirement security.
United Guaranty Corporation, the mortgage insurance business, became the marketplace leader in U.S. mortgage insurance in 2011 with a 30% market share and modified mortgages to help keep about 40,000 families in their homes.
And the last segment, International Lease Finance Corporation, continued to enhance its funding flexibility and executed strategies, particularly with the acquisition of AeroTurbine, that will help maximize the value of its fleet.
The following chart present the sources of AIG’s revenues (in millions) for the year ended December 31, 2011:
What’s Next for AIG?
It’s now the time for AIG to put the crisis behind and refocus on business fundamentals. AIG has seen estimates rising this year and a tremendous progress were made in 2011. For 2012, AIG will continue to focus to strengthen and grow the core global insurance businesses and managing its capital and interest expense more efficiently. If earnings are consistent, I believe by the end of next year they will generate mid-teen returns for the investors. Earnings potential from Chartis and SunAmerica should provide the required buoyancy for long-term growth. The overall enhanced outlook is also highlighted by management’s anticipation of initiating dividends in 2013, thereby boosting investors’ confidence. I believe that AIG has the potential to liberate itself from the clutches of the government, and maintain a strong and competitive business profile in the future.
jhumpasarkar has no positions in the stocks mentioned above. The Motley Fool owns shares of American International Group and has the following options: long JAN 2014 $25.00 calls on American International Group. Motley Fool newsletter services recommend American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.