Treasury to Offload AIG Stock

Basking after a good second-quarter performance, late last week American International Group Inc. (AIG - Analyst Report) announced that the U.S. Treasury will vend off shares worth about $5.0 billion of the company, which were held by the latter.

In this fourth round of stock sale, the Treasury has offered to buy back about 163.9 million shares for an average price of $30.50, modestly above the Treasury’s break-even of $28.73 per AIG share, thereby totaling $5.0 billion.

While AIG intends to repurchase 98.4 million shares for $3.0 billion, the remaining $2.0 billion worth of stock will be raised through open market operations. In addition to the $5.0 billion stock offering, the underwriters are granted a 30-day option of buying another 24.6 million shares for $675 million.

The total stock sale will in turn bring down the Treasury’s stake in the company to 55% from the prior 61%, while the former will still own about 1.06 billion shares of AIG. The Treasury’s stake was previously reduced from 70% to 61% in May this year when it raised about $5.7 billion from the sale of about 189 million shares for an average price of $30.50. Preceding this, the Treasury’s stake was reduced from 77% to 70% in March this year, by shedding 206.9 million shares at $29 per share, amounting $6.0 billion.

Prior to this, in its first secondary stock offering in May 2011, the Treasury had reduced its ownership in AIG from 92% to 77% and it earned about $8.7 billion by selling stock worth $200 million. Following the sale of the current stock offering, AIG will owe about $25 billion to the U.S. government, thereby reducing the burden of the $182.3 billion bailout loan, which was taken by the company in September 2008.

The U.S. government has appointed BofA Merrill Lynch of Bank of America Corp. (BAC - Analyst Report), Barclays Plc (BCS - Snapshot Report), Deutsche Bank AG (DB - Snapshot Report), Goldman Sachs Group Inc. (GS - Analyst Report), JPMorgan Chase & Co. (JPM - Analyst Report), Macquarie Group Ltd., UBS AG (UBS - Analyst Report), Wells Fargo & Co.(WFC - Analyst Report), Morgan Stanley (MS - Analyst Report), Credit Suisse AG (CS - Snapshot Report) and Citigroup Inc. (C - Analyst Report) as book-runners of the latest stock offering.

High Growth Potential Amid Federal Concerns

Given the modest acceleration in AIG’s stock price in the recent months along with an impressive first half of 2012 financial results, we believe that the Treasury is likely to shed off its stake in the company sooner-than-expected, while also generating modest returns out of this investment.

Last week, AIG reported its second-quarter 2012 operating earnings per share of $1.06, outshining the Zacks Consensus Estimate of 59 cents as well as year-ago quarter’s earnings of 68 cents per share. Consequently, operating net income surged 49.8% to $1.86 billion from $1.24 billion in the year-ago quarter.

Results reflected improved operating performance across business operations, increased fair value of Maiden Lane III LLC and lower catastrophe losses that drove the operating cash flow, book value per share and return on equity (ROE). These were partially offset by reduced premiums growth in SunAmerica and Chartis as well as decrease in the fair value of American International Assurance Co. Ltd (AIA) and higher operating expenses.

However, even after the latest stock sale, the Treasury would own more than 50% of AIG. Conversely, a further decline of the Treasury’s stake could raise other fresh regulatory challenges for AIG from the Federal Reserve, who still supervises the company. Moreover, higher expenses, volatile equity markets, widening credit spreads and reduced interest rates continue to showcase declines that will persistently pressurize the margins.

Thus, we remain on the periphery at the moment to analyse the managerial and financial developments in AIG going forward. Consequently, we maintain a long-term Neutral outlook on AIG with Zacks Rank #3, which also implies a short-term Hold rating.