American International Group Inc. attracted investments from BlackRock Inc. and Franklin Resources Inc. as the U.S. government began to wind down its majority stake in the bailed-out insurer.
Index funds overseen by BlackRock, the asset manager led by Laurence D. Fink, tripled their investment in New York-based AIG to more than 13 million shares in the quarter ended June 30, according to data compiled by Bloomberg. San Mateo, California-based Franklin held 16.6 million shares, the data show.
“It’s both important and natural to see large institutional shareholders come on board,” said Clark Troy, a senior analyst based in Chapel Hill, North Carolina, for Aite Group. AIG’s top investors “will look a lot like the shareholder list of other major financial-services companies” when the government exits its stake, he said.
Asset managers are betting AIG will recover from a bailout that forced the firm to sell some of its most profitable units to repay U.S. aid. Index funds are driven by AIG’s increased weight in stock benchmarks after the government cut its stake to 77 percent. Chief Executive Officer Robert Benmosche may today report second-quarter net income of $1.63 billion, compared with a loss of $2.66 billion a year earlier, according to the average estimate of four analysts surveyed by Bloomberg.
Results may include a gain on AIG’s remaining holding in insurer AIA Group Ltd., said Paul Newsome, an analyst at Sandler O’Neill & Partners LP. AIA, which became independent last year when AIG divested a majority stake in a public offering, rose 13 percent in the quarter in Hong Kong.
The number of analysts covering AIG also increased after the share sale as banks including Goldman Sachs Group Inc. and Barclays Plc resumed coverage. Goldman Sachs and Barclays have the equivalent of “hold” ratings on the company and Newsome advises investors to buy the stock.
The insurer trades at about 60 percent of book value, a measure of assets minus liabilities, and is undervalued “due mostly to market pressures caused by the U.S. Treasury’s desire to sell,” wrote Bruce Berkowitz, who oversees the largest non-government stake in AIG.
Berkowitz’s Fairholme Fund had a 94.8 million-share stake in AIG as of May 31, according to a report that accompanied his letter to investors posted on Business Wire this week. Fink’s firm held 10.7 million shares at the end of the second quarter through BlackRock Institutional Trust and 2.8 million at BlackRock Fund Advisors.
Brian Beades, a spokesman for BlackRock, declined to comment as did Franklin’s Matt Walsh.
Institutional investors are important shareholders in companies that compete against AIG, said Tom McCool, director of the Government Accountability Office’s July report on the insurer. The GAO determined that institutions have the capacity to purchase the Treasury’s entire stake in AIG without “considerably changing” their asset-allocation strategies.
“In order to get a stock price that will allow the government to recapture most, if not all of its investment, the Treasury will have to look to the institutional market,” he said. More investors will disclose stakes as they file lists of holdings with the Securities and Exchange Commission this month.
Treasury would need to sell shares at an average of $29.70 to recoup a capital injection of $47.5 billion and unpaid dividends and fees of $1.6 billion, the GAO said. Excluding the dividend and fees, the breakeven price is about $28.73. Treasury sold 200 million shares for $29 each in May.
AIG’s weighting in the S&P 500 tripled to 0.1 percent after an equity offering in May, in which AIG also sold 100 million shares and the government’s stake was lowered from 92 percent.
The insurer will probably make up 0.44 percent of the index once the government has divested all its shares, according to Jimmy Bhullar, an analyst at JPMorgan Chase & Co. That increase could prompt index funds to purchase 150 million more shares, he said in a note to clients on June 27. Large mutual funds may also increase holdings, he said. The Treasury now holds about 1.46 billion shares in the company.
Profit at the property-casualty unit may be hurt by catastrophes, such as the tornado that killed more than 150 people in Joplin, Missouri, in May and the storms that flattened Tuscaloosa, Alabama in April, said Cliff Gallant, an analyst at KBW Inc. The disasters led to a net loss at rival insurer Travelers Cos.
“The weather is going to be a problem” for AIG, said Gallant. “They’re going to have their share of those tornado losses.” He rates the shares “underperform.”