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Economix Blog: Here Comes Earnings Puffery. So Buy the Stock.

February 22, 2013 by Leave a Comment

5:36 p.m. | Updated with closing stock price.

FLOYD NORRIS

FLOYD NORRIS

Notions on high and low finance.

The American International Group is about to start — for the first time in years — trying to make its financial numbers look really good. And that is a reason to buy the stock.

At least that is the opinion of Whitney Tilson, a hedge fund manager. He writes in a e-mail he sends out with investment opinions:

“For the first time in a while, Berkshire isn’t my largest position – AIG is (Berkshire is #2). The company reported solid earnings last night and the stock is up a bit today, but it remains crazy cheap. The key to understanding why this is such a great investment is rooted not in financial analysis, but rather management incentives. When the government was a shareholder (from late 2008 until just a few months ago), AIG’s pay practices were severely restricted. With the government now out, AIG can adopt a normal (ridiculously lucrative) corporate incentive package, including a big stock option package for senior management, which I expect in the near future now that Q4 earnings have been reported. The options will be struck at whatever the market price is at the time so, unlike pretty much every other company, AIG’s management has had incentive to keep the stock price LOW by DEPRESSING earnings. It’s hard to prove, but I think AIG has been doing exactly this by being over-reserved, paying claims extra fast, and taking their time returning capital to shareholders.

Well, all this is about to change. Once the new compensation plan is in place, management’s incentives reverse and I think AIG’s results will be spring-loaded over the next year, which is why I think the stock will double in the next 1-2 years.”

Companies often do have a lot of discretion in reporting earnings, and nowhere is that more true than in the insurance business, where such things as reserve estimates can vary widely even if one assumes complete good faith on the part of those making the estimates.

Mr. Tilson, it would appear, does not assume such good faith.

A.I.G. shares closed Friday at $38.45, up $1.17. If he is right, they will approach $80 by early 2015.

Article source: http://economix.blogs.nytimes.com/2013/02/22/here-comes-earnings-puffery-so-buy-the-stock/?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

DealBook: A.I.G. to Sell $2 Billion Stake in Asia Unit for Share Buyback

September 7, 2012 by Leave a Comment

The headquarters of A.I.A. Group, American International Group's Asian insurance unit, in Hong Kong.Jerome Favre/Bloomberg NewsThe headquarters of A.I.A. Group, American International Group’s Asian insurance unit, in Hong Kong.

The insurance giant American International Group said on Thursday that it planned to sell a $2 billion stake in its Asian insurance unit as part of a plan to repurchase $5 billion worth of its own stock from the United States government.

The move is the latest effort by A.I.G. to shed assets and repay the government after the firm received a $182 billion bailout in 2008.

A.I.G. has been progressively selling its stake in its Asian insurance business, the A.I.A. Group, since listing the company on the Hong Kong Stock Exchange in an initial public offering that raised $17.8 billion.

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Under the terms of the deal announced, A.I.G. will offer investors 600 million shares in A.I.A. at 25.75 Hong Kong dollars to 26.75 Hong Kong dollars, according to the term sheet obtained by DealBook.

On the low end, the price represents a 2.1 percent discount to A.I.A.’s closing price in Hong Kong on Thursday; on the high end, it represents a 1.7 percent premium. The deal will leave A.I.G. with a stake of about 13 percent stake in A.I.A.

Robert H. Benmosche, chief of the American International Group, at a House panel in 2010 on the government's $182 billion bailout.Yuri Gripas/ReutersRobert H. Benmosche, chief of the American International Group, at a House panel in 2010 on the government’s $182 billion bailout.

Earlier this year, A.I.G. sold a $6 billion stake in A.I.A., which is the region’s third-largest insurer.

A.I.G. said on Thursday that it planned to buy as much as $5 billion of its own stock, the third repurchase of its shares this year. A.I.G. added that it would use the proceeds of the A.I.A. share sale, in part, to repurchase its shares.

The Treasury Department has been selling off its stake in A.I.G. Last month, officials said they would sell about $5 billion worth of A.I.G. stock to reduce the government’s holding to around 53 percent, from 92 percent when the firm was first bailed out.

The government’s links with A.I.G. now lie primarily with the Treasury Department’s shares in the insurer. The holdings could prove profitable. The stock is currently trading at almost $35, ahead of the government’s break-even price of $29.

Since receiving a government bailout, A.I.G. has recovered by reinventing itself as a smaller company that largely shies away from the types of complex investments that nearly led to its downfall.

Goldman Sachs and Deutsche Bank are managing the $2 billion share sale for A.I.G.

Article source: http://dealbook.nytimes.com/2012/09/06/a-i-g-to-raise-2-billion-for-share-buyback/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,