AIG (NYSE:AIG) is scheduled to report earnings for the second quarter of 2012 on Thursday, August 2nd. The company has come a long way since the $182.5 billion bailout by the U.S. Treasury Department in 2008. AIG’s public image has also undergone a remarkable makeover during the period as its performance has consistently exceeded expectations. Once branded a failure and a symbol of corporate greed, the company has reported profits during the last two years while repaying government loans. The Treasury’s stake in the company has been cut down from 92% to 60%,  with common stock worth $30 billion left with the government.
The next secondary sale of the Fed’s shares could be a soon as August 3rd, as the 90 day lock-up period agreed to after the last sale just expired.  As the company eventually comes out from under the government’s umbrella, we expect performance to continue to improve. Discussed below are a few key metrics that influence our $31 price estimate for the company’s stock, which is about in line with the current market price.
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Banking On Improvements In The Housing Market
Holdings in subprime mortgage-backed securities were a big reason for the drop in AIG’s credit ratings, which led to a liquidity crisis in 2008. However, with 30-year mortgage rates hitting a low of 3.53%  and delinquency rates showing signs of improvement,  the housing industry in the U.S. seems to be on a gradual road to recovery.
This market movement prompted AIG to once again take its chances in the high risk investments as it seeks to offset low bond yields. The company reported $28.4 billion in non- government-guaranteed residential and commercial-mortgage backed securities holdings in the first quarter, a substantial increase from the $11.1 billion reported at the end of 2010. It will be interesting to see the company’s strategy on investments this quarter as it tries to swim through a low interest rate environment. 
In line with its investments and market trends, AIG has also launched a home-loan insurance business to protect mortgages against failure.  Although this offering has been criticized by several industry peers, we believe it will turn out to be profitable in the long run as the housing industry receives increasing political support. The Federal Housing Finance Agency is currently contemplating ways to distribute housing rick amongst the private sector. With careful underwriting, this offering might turn out to be highly successful.
Brand Image Improving
Property and casualty insurance is AIG’s biggest division, accounting for 56% of the company’s stock value according to our estimates. Although it suffered greatly due to the large number of natural disasters last year, a prudent approach to underwriting has seen the division recover well in the first quarter of 2012. AIG’s resilience and PR activity has greatly helped the division, which had to be renamed to Chartis following the 2008 disaster.
The company is once again ready to use the name AIG for its property and casualty business and has launched an extensive marketing campaign on YouTube to promote its brand. (See AIG Is Ready To Use Its Own Name Again For P&C Business) Catastrophe related losses reported in this quarter will be quite useful to gauge the operational performance of the resurrected division.
Aircraft Leasing Operations To Continue
Although AIG had earlier indicated plans to sell nearly 80% of its stake in its plane-leasing unit, International Lease Finance Corporation (ILFC), it has recently entered into a leasing agreement with China Airlines. According to the terms of the agreement, ILFC will deliver three new Boeing 737-800s to China Airlines in the second quarter of 2013.  The aircraft leasing business has been quite profitable for AIG, but the company is currently trying to divest non-core operations. The earnings call on Thursday might reveal some information about the company’s stance on this process.Notes:
- AIG Launches PR Push on YouTube to Repair Image, Insurance Journal, 30th July, 2012 [↩]
- American International Group: Secondary Coming, Wait To Buy, Seeking Alpha, 30th July, 2012 [↩]
- American International Group, Inc. (NYSE:AIG) Adds Home-Loan Insurance Business; Rival CEO Says it Makes No Sense, Property Mentor Group, 19th July, 2012 [↩]
- Mortgage Delinquency Rate Hits A 4-Year Low, Business Insider, May 16th, 2012 [↩]
- Forecasts Hint Fed Might Change Rate Guidance, Wall Street Journal, 26th June, 2012 [↩]
- AIG Scorned by Old Republic for Insuring Homes Loans: Mortgages, Bloomberg, 19th July, 2012 [↩]
- American International Group, Inc.’s International Lease Finance Corporation To Lease China Airlines Three New Boeing 737-800 Aircraft, Reuters, 30th July, 2012 [↩]