Research

AIG: Pick Up AIG At A 45% Discount To Book Value

We were pleased to get such a strong reception when we published our first report on American International Group (AIG) back in August. We are especially pleased to see it paying back its $182B bailout that the American taxpayers provided to it during the financial crisis. The good news is that the taxpayers have received a nominal profit of $15.1B and the Treasury still holds about $8B of AIG stock representing 15.9% interest in the company. We won’t spoil the mood and point out that the return on capital for this investment is only about 13% cumulative over four going on five years, which is quite low for investing in a financial institution (even if it is a government stake and even if the government has first liquidation security preference).

However, we are pleased that AIG has returned to profitability and it could potentially eliminate the government ownership of the rest of its shares next year. We think that investors should take advantage of potential Hurricane Sandy weakness in the market to enter a position in AIG or add to their stakes. That way, they don’t blow their chance at picking up AIG at a 45% discount to book value.

We reiterate that when investing in turnaround companies such as AIG, we believe that investors should view their potential investments as a collection of exposures.

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