AIG to Improve Capitalization

In an attempt to lower its risk profile, American International Group Inc. ( AIG - Analyst Report ) announced its intention to repurchase bonds worth $1.25 billion from the open market, through a tender offer.

Accordingly, AIG plans to redeem some of its junior subordinated debentures worth about $650 million and another set of bonds with principal amount totaling $275 million. One more set of sterling and Euros denominated debentures, valued at about $325 million are also set for buyback.

The company appointed Credit Suisse Securities LLC of Credit Suisse Group AG ( CS - Snapshot Report ) , JP Morgan Chase & Co. ( JPM - Analyst Report ) and Morgan Stanley ( MS - Analyst Report ) to jointly manage the tender offer.

Following the full repayment of its government bailout loan last year, AIG is steadily moving toward attaining capital flexibility. This is reflected by its financial leverage that declined to 22% now from 31% at 2010-end. Although it is still higher than the peer group, the latest announcement of bond redemption and the sale of its aircraft leasing unit – International Lease Finance Corp. (ILFC) -- by mid-2013 is further expected to improve AIG’s leverage.

Capitalizing on Opportunities in Israel

Notably, AIG decided to take full ownership in AIG Israel by purchasing 49.99% stake from Aurec Gold Investments Ltd. early this week. The company already owns the remaining 50.01% in this Israel-based operation. This will terminate the joint venture between AIG and Aurec that lasted over 16 years. However, the deal awaits the approval of the insurance regulator in Israel.

AIG’s insurance operations in Israel have been witnessing significant improvement since 2001. Moreover, the decision to own all of the Israeli operations blends well with the company’s long-term growth strategy of engendering higher earnings from the rapidly emerging nations.

Earnings Preview

AIG is slated to release its fourth-quarter 2012 earnings after the closing bell on Feb 21, 2013. The Zacks Consensus Estimate for the fourth quarter is pegged at a loss of 9 cents a share, given higher catastrophe losses from Hurricane Sandy. However, earnings are expected to grow by about 269% over 2011 to $3.77 per share in full-year 2012. Currently, the company carries a Zacks Rank #4 (Sell).