It's been an eventful few days for insurance giant AIG (NYSE: AIG). There are three major announcements that we need to focus in on to see whether there's a meaningful change to the investment case for the company.
- First, AIG's estimates for the cost of superstorm Sandy have come in, and they're much higher than expected. Pre-tax, the insurer said the storm was a $2 billion hit. After taxes and reinsurance, that's expected to fall to $1.3 billion. Not only is this more than was anticipated out of AIG, it's significantly more than what competitors reported.
- The second of the big announcements out of AIG was the sale of roughly 80% of its aircraft leasing unit, ILFC. The stake is being bought by a consortium of Chinese buyers for $4.2 billion, which values ILFC at around $5.3 billion. AIG is also issuing an option for an additional 10% of the company. AIG plans to hang onto 10% of ILFC.
- Finally, the U.S. Treasury announced that it plans to sell its remaining stake in AIG, closing out its controversial ownership of the company and leaving it once again a fully private entity.
Taken together, this is a mixed bag for AIG, but on balance, I'm somewhat concerned that it could be more bad news for shareholders than good. Starting with the good news, there are positives for investors in both the ILFC sale and the Treasury's exit. Based on the most recently reported book value, ILFC was sold at a valuation of 0.67 times book. This stacks up well against comparables like AerCap and Aircastle, which currently trade at respective book-value multiples 0.73 and 0.6.
AIG had ILFC on the path toward an initial public offering, but the sale sidesteps the need to wade into a lackluster IPO market and gets the transaction done more quickly. Shedding the unit lets the insurer further narrow its focus to its core business units and significantly frees up its balance sheet as aircraft leasing is a hugely capital-intensive activity. One potential hitch is that since it's being sold to a Chinese group, the regulatory-approval process isn't a slam dunk.
As for the Treasury sale, this eliminates a big overhang on AIG's stock and frees up the company to once again operate with greater flexibility in terms of attracting employees. From an image perspective, this should also be a nice feather in AIG's hat — at the time of the bailout, there were precious few observers that had much confidence in the Treasury recouping its money, let alone making a profit.
On the other hand, we've got the big losses at AIG's property and casualty unit from Sandy. Had these losses been more in line with what others in the industry were reporting, we probably wouldn't have much to worry about. But given that AIG's losses seem to be much higher than its peers, and I was already concerned about the quality of the company's P&C operations, this is a bit disheartening.
Because of the nature of the insurance business, turning on a dime can't really be expected, so I don't view this as a definitive sign that the turnaround isn't happening. Plus, it's certainly possible that at this relatively early stage after Sandy, AIG is being realistic and conservative about its losses while competitors are underestimating theirs. In any case, this is even more reason for investors to keep a close watch on AIG's P&C business results.
What may not be obvious, but is a bit disconcerting to me, is the fact that the ILFC and Treasury announcements came so close together. CEO Robert Benmosche has talked about what he wanted to finish before departing, and these were on that list. While investors should be glad to see these milestones achieved, there may be reason to worry that their completion only hurries along Benmosche's retirement. Given the great work that Benmosche has done at AIG and the lack of a clear successor that'll be as impressive as the former MetLife CEO, this is a concern for me.
Overall, I'm still bullish on AIG. The company has taken huge strides since it was near failure and epically bailed out. It's moving in the right direction and, as of right now, has a leader at the helm that has shown an impressive capacity to make clear, bold decisions to put AIG on the right path. My enthusiasm is taken down a half-notch for the reasons mentioned above – as well as the fact that the stock has climbed close to 20% over the past six months – but with the stock still trading at 0.48 times (September 2012) tangible book value, I think this is an attractive buy for investors with a long-term focus and a willingness to follow the unfolding story.
Matt Koppenheffer owns shares of American International Group. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: Long Jan 2014 $25 Calls on 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.