Enough Whining, AIG Deal Was a Winner: Street Whispers

NEW YORK ( TheStreet) -- Four years on, the U.S. government still owns more than half of American International Group ( AIG), and that's a good thing.

Four years after bailing out the insurer to a degree that far surpassed any of the bank beneficiaries of the Troubled Assets Relief Program, or TARP, the U.S. Treasury said on Monday that after completing a $5 billion offering of government government-held shares of AIG on Friday, the overallotment on the offering was exercised, leaving the Treasury expecting its proceeds from the offering to increase "to approximately $5.75 billion and the total number of shares sold in the offering to approximately 188.5 million."

The Treasury said that following the offering -- with AIG purchasing about $3 billion worth of the shares -- the government would be left holding roughly 53% of the company's common shares, worth about $24.2 billion.

While there are many media voices disgusted by the bailout, a "glass half full" approach shows just how far the company has come since the Treasury and the Federal Reserve forked over $182 billion to save the company in 2008.

The Treasury said that "in addition to principal repayments, which have reduced the government's remaining outstanding investment to $24.2 billion, the Federal Reserve and Treasury have also received additional income beyond that from interest, fees, and other gains. That additional income beyond principal repayments totals $14 billion, including approximately $13 billion from the Federal Reserve's investment and approximately $1 billion from Treasury's investment.

The Federal Reserve Bank of New York was repaid in full, as part of the deal that converted the Treasury's investment in AIG to common shares in January 2011.

Even though the Government's remaining stake in AIG is large by any standard, the stake represents only 13% of the total assistance provided to the insurer, and Uncle Sam's shares keep rising in value.

The government's process in completing its disengagement from AIG is a slow one, and for good reason. By selling the shares in an orderly fashion -- with AIG repurchasing most of them -- the company's shareholders are not facing the market disruption that would come if the Treasury had decided to dump huge lots of shares straight into the open market. Each time the government conducts a similar offering, the number of outstanding shares declines, thus pushing up earnings estimates and providing stronger support for the shares.

Sterne Agee analyst John Nadel on Monday said that even though the $5.75 billion secondary offering and AIG buyback were "somewhat smaller than expected... the key provision, in our view, is the 30-day lock-up (much shorter than prior 60- and 90-day lock-ups), which suggests to us another offering/buyback coming before the end of 3Q12."

Nadel added that AIG "will be freed from its lock-up on September 4th to sell its remaining stake in Asian insurer AIA Group, currently worth an estimated $7.5 billion," and that if the company sells its entire 19% stake in AIA, "we expect AIG will have buyback capacity between $7.5 - $10.0 billion for the next secondary offering by Treasury, meaning calendar year 2012 buybacks will likely end up totaling between $15.5 - $18.0 billion." This means the government's remaining stake in AIG could be cut in half by the end of the year.

Nadel rates AIG a "Buy," with a price target of $39, and said that his firm's estimates "assume $4b of buybacks in 3Q12 at an average price of $30 and another $7b of buybacks in 4Q12 at an average price of $31."

"We estimate each $1b change in buybacks would result in about a 2% change in our 2013/14E EPS and about a 5-10bps change in forecasted return on equity. Each $1 change in the assumed share price for buybacks would result in about a 1% change in our 2013/14E EPS," he said.

Investors were pleased, sending AIG's shares up over 3% in afternoon trading, to $32.31.

AIG's shares closed at $31.34 Friday, returning 35% year-to-date.

AIG Chart AIG data by YCharts

The shares traded for nine times the consensus 2013 EPS estimate of $3.37. The consensus 2012 EPS estimate is $3.88.

Interested in more on American International Group? See TheStreet Ratings' report card for this stock.


-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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