Reasons to Hate AIG and Reasons to Buy AIG
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Whenever someone wants to bring up an example of financial irresponsibility and corporate greed, American Inernational Group (NYSE: AIG) is frequently chosen because of its status as a poster child for collapse and government bailouts. At $182 billion, the insurer received one of the largest bailout packages at about $600 for every man, woman, and child living in the United States. However, AIG refused to tighten its belt after accepting government funds and as reports of lavish trips and bonuses for the same executives who wrecked the company surfaced, the public hated AIG and the culture it promoted even more.
The New AIG
Fast forward four years and a new AIG is beginning to emerge. Unlike the previous AIG which destroyed shareholder value on an epic scale, the new AIG is successfully building shareholder value by taking advantage of current opportunities. Since the stock trades at only 0.6X its tangible book value, buying it would be an excellent value play. And who better to buy AIG stock than AIG itself. The insurer is committed to buying back billions of dollars of discounted stock and did so most recently when it bought back $3 billion of stock in the latest government offering. Major investors are also taking notice of the changes at AIG with Bruce Berkowitz aggressively buying AIG in his Fairholme Fund. The fund now holds millions of AIG common shares and nearly a third of all outstanding AIG stock warrants.
AIG is taking advantage of an improving corporate image to re-brand insurance units as well. The names of Chartis and SunAmerica will no longer be substitutes for the AIG name on the P&C and retirement units of the company. AIG CEO Robert Benmosche now feels comfortable using the AIG name again and this could increase sales since people recognize and believe in the name AIG but are less likely to know the names Chartis or SunAmerica as reliable insurance names.
Long live AIG
AIG is back from the near dead and unlike mortgage giants Fannie Mae (OTCBB: FNMA) and Freddie Mac (OTCBB: FMCC), AIG is not a zombie stock. The insurer is making strategic decisions that are benefiting shareholders by reducing the number of outstanding shares to grow book value and divesting non-core assets while strengthening its core operations. If AIG could trade at the same valuation as rivals such as Prudential (NYSE: PRU), the share price would increase dramatically and could result in a doubling of the price per share.
For a leveraged play on AIG, one could buy AIG warrants (NYSE: AIG-) which trade around $15 per warrant and give the holder the right to buy one share at $45 until Jan. 19, 2021. If the shares rise to trade at only present book value, the share price would be only a few dollars away from covering both the exercise price and the time premium.
With a continued recovery in AIG, both shareholders and warrant holders should see strong gains. And as we move further away from the events that caused the things we hate about AIG, the reasons to buy AIG could become even more compelling. The insurer could see even more institutional buying after the government stake is eliminated in the coming months and the re-adoption of the AIG brand name could lend an image of stability to the company's insurance offerings. All of this results in increased sales and higher share prices, both good news for AIG investors.
TulipSpeculator1 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.