American International Group’s $8.7bn stock offering last week was supposed to signal the company’s harrowing journey back from the brink of collapse was nearly complete.
Yet if the insurance group’s recent share performance is any guide, it still has a way to go.
Between January and last week when the US Treasury pared its stake in AIG from 92 per cent to 77 per cent in a $29-a-share offering, the stock lost almost half its value. The insurer’s shares closed at $28.84 on Friday.
In the run-up to the sale, a string of violent storms battered the US Midwest and south-east and investors worried about the impact on profits.
During the roadshow, AIG executives, Treasury officials and their bankers sought to win over new investors with its bold restructuring, but then reduced the size of the sale in the face of patchy demand. Some institutions decided the company’s return on equity target was too rosy, others worried about regulatory uncertainty. In one of many ironies borne out of the crisis, Treasury secretary Tim Geithner will lead a process later this year to classify some financial companies as systemically important, including AIG, subjecting them to higher capital requirements.
This will crimp returns at a company still largely owned by the government.
Nevertheless, AIG is one step closer to regaining its independence, with the hope that as the government withdraws, investors’ attention will return to the core insurance businesses that had once helped make AIG one of the world’s largest financial institutions.
“Today marks the latest major milestone in AIG’s comeback,” Bob Benmosche, the company’s chief executive, said on Friday, announcing the completion of its 300m share offering. The Treasury – which sold at a level that implies a small profit on its $47.5bn cash investment in AIG, one part of a $180bn bail-out – is now hoping for a bigger share sale at a higher price in the autumn.
“They need to deliver some earnings,” said Paul Newsome, an analyst with Sandler O’Neill Partners who rates AIG a “buy”.
Under Mr Benmosche’s direction, AIG sold, spun off or shuttered businesses ranging from its Alico, AIG Star and AIG Edison Life to American General Finance and AIA. Yet AIG has remained a major force in the insurance markets, particularly its global property and casualty business now known as Chartis.
Chartis’ competitive strength has led to repeated accusations in the US, European and London markets that the group has been unfairly using its government backing to underprice its policies and retain customers. The insurer has retained its market share in many areas despite having numerous teams of underwriters poached by rivals in recent years, according to brokers and analysts.
Chubb and Liberty Mutual have led the criticism in the US, while a number of companies in the Lloyd’s of London market, including Hiscox, were also critical in the past.
For some in the market, AIG’s strengthening of reserves by more than $4bn was a sign that those chickens are coming home to roost. AIG has disputed the allegations, noting its extra reserves were needed to cover historic problems in casualty businesses. In 2009, the Government Accountability Office said it had found no evidence of underpricing by AIG.
Even so, the industry is going through a tough patch. AIG posted operating income of $2bn during the period, in line with its stated goal of earning between $6bn and $8bn this year. The company took a $1.7bn hit along with the rest of the industry on the devastating earthquake that struck Japan.
According to Gregory Locraft analyst at Morgan Stanley, severe US weather is compounding the catastrophe losses taken by the industry globally in the first quarter. “The second quarter is on track to be one of the worst on record as severe thunderstorms and tornadoes have devastated parts of the southern and south-eastern US.
“Unlike the first quarter, however, tornado exclusions and high primary deductibles point to these losses being more contained within US primary companies rather than the reinsurance marketplace.”
This only makes it harder for AIG to repair its profitability or lure more long-term investors.
“They’ve been under the microscope for three long years,” Bruce Berkowitz, a money manager whose Fairholme Funds was AIG’s second-biggest shareholder, said. “Once that overhang’s finished, there’ll be greater amounts of uncertainty put aside, removed.”