The U.S. Treasury’s decision to sell around $18 billion of its AIG (NYSE:AIG) stock on Tuesday, 11th September came shortly after the company announced its $5 billion plan for buybacks from the Treasury.  (See AIG To Fund Repurchase With AIA Sale for more details on the plan) The Treasury’s sale included an offering of 553.8 million shares of AIG’s common stock at price of $32.50 per share. The global coordinators for the deal are Citigroup, Deutsche Bank Securities Inc., Goldman, Sachs & Co., and J.P. Morgan Securities LLC while Merrill Lynch, Barclays Capital Inc., Morgan Stanley & Co. LLC, RBC Capital Markets, LLC, UBS Securities LLC, Wells Fargo Securities, LLC and Credit Suisse Securities (USA) LLC will act as joint book runners.
The sale would reduce the Treasury’s stake in the company from 53.4% to 15.9% as the underwriters involved have exercised their option to purchase an additional 83.1 million shares for $2.7 billion. We look below at the effects that the deal could have on AIG in the future.
The Story So Far
AIG’s affair with the government began in 2008, when the company suffered a severe and sudden liquidity crisis as credit default swaps written by AIG Financial Products Corp. (AIGFP) plummeted in value, leading to a downgrade in the company’s credit rating and making the company insolvent. As a result, the Federal Reserve Bank of New York (FRBNY) created a secured credit facility to enable AIG to meet its obligations. The total support received from the U.S. government eventually reached $182 billion, with the Treasury Department holding 92% of the company’s total outstanding common stock. This was the largest bailout received by a private company during the financial crisis.
Facing public anger, AIG undertook a plan to restructure its operations to repay loans from the government. The plan included the divestiture of non-core assets such as Japan-based life insurance subsidiaries, AIG Star Life Insurance Co., Ltd. and AIG Edison Life Insurance Company, which were sold to Prudential Financial (NYSE:PRU) in 2010. AIG also sold American Life Insurance Company (ALICO) to MetLife (NYSE:MET) for approximately $16.2 billion and 67% of its stake in American International Assurance (AIA) through an initial public offering in October, 2010.
The cash proceeds generated from the sales as well as sales of other assets like American General Finance Inc. (AGF) and AIG Finance (Hong Kong) Limited were used to repay the FRBNY credit facility in full. Through a series of stock sales AIG reduced the Treasury’s ownership from 92% to 53.4%. The last of the Treasury’s sales came in August involving a sale of $5.75 billion worth of shares for a price of $30.50 per share. AIG bought back shares worth $2.0 billion, with shares worth $3.0 billion sold in the open market and $750 million sold to the underwriters.
AIG has also wound down its derivatives portfolio from investments of $1,800 billion in 2008 to $190 billion at the end of 2011.
But What Does It Mean For AIG?
Following the bailout, AIG decided to restructure operations to focus on its international property and casualty and U.S. life insurance and retirement businesses. In a mature market like the U.S., where competition is stiff and most companies are offering similar products, brand image is an important factor influencing the sales of a product. Needless to say, AIG’s brand image suffered a massive blow in 2008, following the financial collapse. Public anger against the company reached a peak in 2009 when AIG announced plans to allocate $1.2 billion for employee bonuses, including $165 million in executive bonuses.  The public was furious and politicians including President Barrack Obama  questioned the company’s decision to use the tax payer’s money to pay unwarranted bonuses to executives. Edward Liddy, the CEO at the time, eventually resigned following in part due to this PR debacle.
To assuage the public, AIG announced that it would repay the debt it owed to the American public and would regain its trust. So far, it has come good on its promise as the government has made a profit of around $15.1 billion through the sales of the company’s shares. Further sales of the Treasury’s stake are expected to add to the profit the government will generate. The company has also recovered America’s trust, earlier this year, Chief Executive Officer, Robert H. Benmosche announced that the property and casualty division, Chartis, which was renamed from AIU Holdings LLC following the crisis to distance it from the parent company, would once again use the AIG name. (See AIG Is Ready To Use Its Own Name Again For P&C Business for more details)
AIG currently markets life insurance and retirement solutions in the U.S. under the name “SunAmerica”. Last year, it started selling life insurance in the country, using the name AIG Direct and received positive response. The company has increased sales of equity-linked variable annuities even as competitors such as MetLife are cutting back on the product to reduce market exposure. Variable annuities have been quite popular among the American public and increased focus on the product allowed AIG to increase market share from about 4.5%, in 2010 and 2011, to 5.7% in the first half of 2012.  Annuity sales during the period increased by over 20%, year-on-year.
Apart from brand image, distribution is the main key factor determining the sales of an insurance product. AIG has established an effective distribution network that includes banks, national, regional and independent broker-dealers, affiliated financial advisers and independent and career insurance agents. To augment this network, AIG recently acquired broker-dealer, Woodbury Financial from industry peers, Hartford Financial Services Group, adding 1,400 financial advisers to its network. 
We believe that effective distribution and an improvement in brand image will boost sales of AIG’s life insurance and retirement products in the future.
We believe that AIG is fairly valued as our $35 valuation of the AIG’s stock is in-line with the current market price. You can gauge the effects of a change in forecast, by modifying the graph shown aboveNotes:
- AIG Announces U.S. Department of the Treasury Expects $2.7 Billion in Additional Proceeds from AIG Common Stock Offering, Press Release, 11th September, 2011 [↩]
- American Inconscionable Group, Fox Business, March 17th, 2009 [↩]
- Obama’s Statement on A.I.G., The New York Times, 16th March, 2009 [↩]
- U.S. Individual Annuities Sales Survey, LIMRA [↩]
- AIG Buying Hartford Financial Brokerage Unit, Wall Street Journal, 31st July, 2012 [↩]