Gov’t Ownership Overhang Weighing on AIG
During the past month, American International Group (NYSE:AIG) experienced a near 10% drop in its stock price after announcing that it would sell down some of the government’s stake. One hundred million shares were issued and sold by the company and another 200 million by the US Department of Treasury for total proceeds of $8.7 billion. AIG did not receive any of the proceeds from that sale. The Treasury’s ownership in the company has declined from 92% to 77%, and it still has around 1.5 billion shares available to sell over the next couple of years — or in other words – whenever it can. This will continue to weigh on shares going forward as investors know their upside is capped as a large selling awaits on the other side. AIG is one of the largest insurance company in the U.S. and competes with MetLife (NYSE:MET), Hartford Financial (NYSE:HIG), Prudential Financial (NYSE:PRU) and others.
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We have a price estimate of $27.50 on AIG’s stock which is almost the same as the current market price. Below we look at its property & casualty and aircraft leasing business.
Property & Casualty Insurance Operating Margin under Pressure
This year, the U.S. has witnessed some of the largest and most destructive tornado storms in recent history which could have an adverse impact on AIG’s property & casualty operating margin. The company maintained a healthy margin of over 20% during 2006 and 2007 but heavy investment losses caused margins to drop to -7% in 2008. Since then, high competition and slow market recovery has hampered AIG’s operating margin growth, which recovered only to -0.3% in 2010. High level of property and casualty claims in 2011 will continue to pressure AIG’s operating margin, and we expect margins to reach 20% level not before 2013.
Lower Aircraft Leasing Revenues
AIG’s aircraft leasing business that is controlled by its subsidiary, International Lease Finance Corp. (ILFC), is one of the world’s largest aircraft lessors. The rising cost of fuel has caused many airlines to ground their older and less fuel efficient aircraft, and this directly affects the leasing rate for ILFC.
We expect AIG’s aircraft leasing revenues to decline by 5% in 2011 as the current cash crunch faced by the company will restrict its ability to purchase new aircrafts in the immediate future.