Less than a year ago, a number of gurus were busy yanking their money out of the debt-laden insurer American International Group Inc. (AIG, Financial). But a distrust of the stock may be slowly dissipating, according to a GuruFocus review of guru holdings of AIG in the fourth quarter.
The issue still begs the question: Can the poster child for one of America’s biggest bailouts turn itself around?
Joel Salomon, a former life insurance actuary and hedge fund manager in New York City, tells GuruFocus the question is best answered with a popular metaphor.
“It’s going to be like turning around a very large steam ship,’’ Salomon tells GuruFocus. “It’s hard to turn these around very quickly, and sometimes, it can take years.”
It’s been 10 years since the Federal Reserve stepped in to save AIG from bankruptcy. An infusion of $85 billion kept the giant insurer going and American banks from folding along with it.
But even today, some of the most troubling details of the bailout remain secret. Last year, the Securities & Exchange Commission struck a deal with AIG to keep a lid on some controversial documents. The SEC’s order expires in November 2018.
Signs of life
This month, guru Jeff Auxier (Trades, Portfolio) threw his support behind AIG’s current Chairman and CEO Brian Duppereault, who replaced former CEO Peter Hancock last May. Auxier says Duppereault was able to turn around yet another troubled company, Marsh & Ă‚ÂĂ‚ÂMcLennan. So why not AIG?
Steven Romick (Trades, Portfolio) also lauded a decision by AIG’s board of directors to hold management accountable after reports of sloppy underwriting. That’s when it turned over the reins to Duppereault.
Several weeks ago, AIG paid $5.5 billion in an all-cash deal to acquire Validus Holdings Ltd. (VR) a Bermuda-based insurer and reinsurer. AIG said the acquisition will help strengthen its global insurance business and improve underwriting.
Last year, AIG paid $10.2 billion to Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway (BRK.A, BRK.B) to take on a series of risks on some of its U.S. commercial insurance policies. The deal affects policies that began before 2014.
But Salomon, like other industry watchers, says the heavy lifting has only just begun.
“AIG has had a big brain drain over there for a number of years because (former employees) individuals have gone to other companies. They’ve been hiring quality people and adding very solid management, but when you bring in new management they will want to do things their way and that will take some time."
“It takes a while to turn around insurance companies.”
Bailing out
A dumping spree of AIG shares lasted well into the third quarter of last year. Early in the year, John Burbank (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and David Dreman (Trades, Portfolio) washed their hands of AIG.
Many others bailed, in some cases by slashing millions more. First Eagle Investment (Trades, Portfolio) dumped 6 million shares, representing 28% portfolio space; NWQ Managers (Trades, Portfolio) divested 4,100 shares, representing 95%; Donald Smith (Trades, Portfolio), 1.6 million shares, representing 10%; John Paulson (Trades, Portfolio), 4.5 million shares, representing 5%; First Pacific Advisors (Trades, Portfolio), 10 million shares, representing 4.25%; Barrow, Hanley, Mewhinney & Strauss, 7.7 million shares, representing 4.19%; Romick, 7.8 million shares, representing 3.11%; Charles Brandes (Trades, Portfolio), almost 2 million shares, representing 2.62%; Jeremy Grantham (Trades, Portfolio), 1.44 million shares, representing 0.36%.
Sinking stock
In the days before the 2008 market crash, AIG stock was trading for over $840 a share. The stock sank shortly after Fed Chairman Ben Bernanke intervened.
By March 2009, it was selling for under $21 a share. Early Wednesday, it was trading at $60.85 a share, up 1.35%.
The stock must hit $90.99 for Dupperreault to exercise the maximum number of his stock options over the next several years. Reports show he is being paid a minimum $16 million package for 2017, including the option to buy up to $1.5 million AIG shares.
Guru buys
In the final months of the year, NWQ Managers opened a position in the company. The stock sold for an average price of $61 a share and sits in 0.85% portfolio space.
Pioneer Investments (Trades, Portfolio) bought 1 million shares in the final quarter for an average price of $61 a share, representing 0.1% of the portfolio.
In his fourth-quarter portfolio, Carl Icahn (Trades, Portfolio) owned 42 million shares of the company, which represents 11.3% of his holdings.
Debt-laden company
AIG has a market cap of $55 billion. Its trailing 12-month revenue is $49 billion. Earnings per share over the trailing 12 months is -$6.7 and it has an operating margin of 3%. AIG's dividend yield is 2.1%. Its price-book ratio is 0.9 and its price-sale ratio is 1.2. Its return on equity is -8.4% and its return on assets is -1.2%.
AIG has a business predictability rating of one-star, ranking it a 3 out of 10 in financial strength and 4 of 10 in profitability and growth, according to GuruFocus.
GuruFocus reports the company has poor financial strength because of its high debt load.
Fourth-quarter earnings
AIG made money in the fourth quarter in spite of disasters, such storms and wildfires.
It was saved by its property, casualty and insurance businesses, after record catastrophe losses of $4.2 billion.
The company recently delivered approximately $1.5 billion in pre-tax income and over $3 billion in adjusted pre-tax income.
In the fourth quarter, it reported a net loss of $6.7 billion, or $7.33 per share. In the prior-year quarter, it had a net loss of $3 billion, or $2.96 per share.
The fourth-quarter net loss included a charge of $6.7 billion related to the enactment of the Tax Cuts and Jobs Act.
Adjusted after-tax income was $526 million, or 57 cents per diluted share, for the fourth quarter, compared to an adjusted after-tax loss of $2.8 billion, or $2.72 per share, in the prior-year quarter.
