AIG Will Not Sue After Crawling Out Of Public Relations Purgatory

-0.24%
Downside
78.17
Market
77.98
Trefis
AIG: American International Group logo
AIG
American International Group

Just a few weeks after launching its nationwide “Thank You America” ad campaign, AIG (NYSE:AIG) faces a public relations nightmare as former CEO, Maurice Greenberg, has filed a class action lawsuit against the U.S. Government. [1] Greenberg’s company, Starr International, held a 12% stake in AIG before the 2008 financial crisis that had forced the insurer to seek help from the government, in the form of a $182 billion bailout package.

Starr International believes that the government was unfair to the AIG shareholders, charging a high rate of interest at 15%, claiming 92% ownership and forcing it to sell some of its biggest assets like American International Assurance and American Life Insurance Company (ALICO), which was sold to MetLife (NYSE:MET), for approximately $16.2 billion. Starr International is seeking $25 billion in damages from the Treasury Department.

The AIG board has decided not to join Starr in its quest, and will not allow it to pursue the case on AIG’s behalf, but still had a fiduciary duty to consider the case. The news that AIG was even considering suing the government, led to an online onslaught on the company, with the volume of negative tweets against the company rising 50 times on Tuesday. AIG has worked hard to re-establish its public image after the 2008 debacle, and had even taken the decision to rename the P&C division, Chartis, to AIG Property Casualty and SunAmerica to AIG Life and Retirement, in the third quarter of 2012.

Relevant Articles
  1. Up 14% In The Last Twelve Months, What To Expect From American International Group Stock In Q4?
  2. Up 9% In The Last One Month, Where Is American International Group Stock Headed?
  3. American International Group Stock Is Undervalued
  4. American International Group’s Stock Is Trading Below Its Intrinsic Value
  5. American International Group Stock To Post Mixed Results In Q4
  6. Forecast Of The Day: AIG’s International Net Premiums Earned

Opting out of the lawsuit might help assuage the public furor, but there is still a possibility that AIG might be sued by Starr International for not acting in the best interest of its shareholders. Our $45 valuation of the AIG’s stock is in line with the current market price.

Check out our complete coverage of AIG here

Biting The Hand That Feeds?

AIG’s affair with the government began in 2008, when the company suffered a liquidity crisis as credit default swaps written by AIG Financial Products Corp. (AIGFP) declined in value substantially, leading to a downgrade in the company’s credit rating and threatening its solvency. As a result, the Federal Reserve Bank of New York (FRBNY) had to create a secured credit facility to enable AIG to meet its obligations. The total support received from the U.S. Government 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.

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. The Treasury sold its stake in AIG through a series of stock sales and ended up with a profit of $22.7 billion. This helped AIG’s public perception, as the company was able to rename its business units to reflect the parent brand.

However the possibility of the company suing the very government from which it sought help has led to an outburst of public anger, and AIG will now have to work hard to maintain its image. Brand value along with distribution is quite important while making an insurance sale. AIG already has a strong distribution network of banks and broker dealers and will have to maintain its brand to survive in a highly competitive insurance market in the U.S. There are approximately 2,462 total P&C companies in the U.S. with which AIG competes for market share.

Property and casualty accounts for two-thirds of AIG’s revenues with half of its income coming from the U.S. American retirement solutions and life insurance divisions account for about a quarter of the company’s revenues. You can modify the interactive chart below to gauge the effect a loss or gain its market share will have on our price estimate.

Submit a Post at Trefis Powered by Data and Interactive Charts | Understand What Drives a Stock at Trefis

Notes:
  1. American International Group, Inc. : As public fumes, AIG says will not sue U.S. over bailout, 4-Traders, 9th January, 2013 []