What You Need to Know About AIG's Recent Moves
Dec 11th 2012 11:36AM
Updated Dec 11th 2012 5:12PM
In a business -- insurance -- that isn't known for dynamism, there's sure been plenty of action around AIG . Only several years past receiving some heavy financial CPR from the government, the company is trying to push ahead and get on with its life. To that end, it's made financial news headlines quite a bit in recent days; let's take a look at how these recent doings will affect operations. First and foremost, there's...
The ILFC sale
This was a big, big, deal. In fact, at over $4.2 billion for a stake of just over 80% to a consortium of Chinese investors, it's the largest acquisition between the two nations in history. Which is saying something, considering that the previous record-holder was China Investment Corp's $3 billion buy-in of Blackstone in 2007.
ILFC is one of the largest aircraft leasing companies in the world. The reason it's part of a big insurance company -- and has been for over 20 years -- is a story for another time -- suffice it to say the firm is not complimentary to AIG's core business. Ever since the insurer nearly crashed and burned in the dark days of 2008, it's been shedding non-core assets, so ILFC was a prime candidate for a sale.
Everyone knew it, so it's to AIG's credit that it was able to get a decent price for the unit. Way back in 1990, it acquired the California-based company for $1.16 billion, meaning AIG might make an over five-fold return on its investment if the consortium exercises its right to buy another 9.9%.
One drawback to the sale is the effect it'll have on net; according to AIG, it's going to book a financial (read: accounting) loss of $4.4 billion. Yee-ouch. But that $4.2 billion sale price represents a lot of scratch, and the company sheds another non-essential asset, so all things considered, the sale is a victory. Which will make it easier for...
The Feds to get rid of their stake
Can it really be only two short years ago that the long-suffering American taxpayer was the majority -- and nearly only -- shareholder in AIG? After saving it with what amounted to $182 billion in rescue funds, the government (in the form of the Treasury Department) took a 92% stake in the company.
Fast-forward to late 2012, and that number has shriveled to just under 16%. Soon it'll be nothing, as Treasury just announced that final shareholding will be sold in a public offering.
This announcement came just after the ILFC news, which is hardly a coincidence. Treasury surely likes the idea that AIG is now a few billion dollars richer, as the company can continue reimbursing for that bailout money.
That's because it's been a big subscriber to the government's series of share divestments. The last round, for example, saw the Feds take in something around $20 billion in a very successful issue. This was due in no small part to the insurer, which was responsible for about one-quarter of that amount.
This final stake is worth approximately $7.7 billion in total at the current share price, so ponying up for a chunk of it won't drain AIG's fattened bank account too much. Both sides win; the company gets rid of the government as a business partner, and the rescuers improve their return on the bailout (profit for the Feds is around $15 billion and counting).
It remains to be seen just how wide the firm will open its wallet for the government's upcoming sell-off. Because looming over the current quarter is...
The financial hit from Hurricane Sandy
The awful megastorm that hit the Northeast in October is rapidly on the way to being the second-worst natural disaster in our history, in terms of total damage. According to one recent estimate, total property damage could total as much as $50 billion. Insured losses are expected to come in anywhere from $7 billion to $20 billion.
Some insurers are well covered for the claims they'll have to pay, and some aren't. AIG, unfortunately, belongs to the latter category. According to its preliminary calculations, it'll end up paying in the neighborhood of $1.3 billion. That, combined with the charge for ILFC, should color the fourth-quarter bottom line a deep shade of red.
The company can withstand it, particularly considering the new money coming in from the Chinese deal. It's better poised to do so than Allstate , which takes in roughly half as much revenue, has a much smaller cash pile, and is looking at Sandy claims of around $1.08 billion.
But it's not sitting as pretty as Travelers the smaller Hartford Financial Services , both of which are well covered by reinsurance programs. The two will take relatively light hits, at around $650 million and (potentially) $370 million, respectively.
The company is improving
Post-bailout AIG is an encouraging example of a company that can come back from the dead. Its operating result has been well in the black in each of the past four quarters, that government monkey is soon to jump off its back, and through sales of unwanted divisions, it's becoming a proper insurance company again.
There are risks and problems ahead, of course. But now that the company is slimmer and keeps fit by doing shareholder-enriching deals, it's better prepared to handle them than it's been in the recent past.
AIG's a sizable company, and there's a lot to know about it. The best place to start for an insightful look at its operations and future potential is to read our premium analyst report on the company. Just click here now for instant access.
The article What You Need to Know About AIG's Recent Moves originally appeared on Fool.com.Eric Volkman has no positions in the stocks mentioned above. The Motley Fool owns shares of American International Group and has the following options: long JAN 2014 $25.00 calls on American International Group. Motley Fool newsletter services recommend 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.
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