AIG’s Buyback With AIA Share Sale Misses Analysts’ Mark

AIG CEO Robert Benmosche
Robert Benmosche, chief executive officer of American International Group Inc. (AIG). Photographer: Gianluca Colla/Bloomberg

American International Group Inc. announced stock-repurchase plans that fell short of analysts’ expectations when the insurer was the only financial firm to decline in the Standard & Poor’s 500 Index.

AIG, recipient of a U.S. bailout in 2008, said it may acquire $5 billion of its shares from the Treasury Department and announced the sale of $2 billion of its stake in Hong Kong-based insurer AIA Group Ltd. The size of both actions fell short of expectations, according to Wells Fargo & Co. Deutsche Bank AG analysts said Sept. 5 the buyback may be at least $10 billion.

“The sale of only a partial stake of AIA and only $5 billion of potential buybacks leaves us underwhelmed,” analysts including John Nadel at Sterne Agee & Leach Inc. wrote in a note yesterday. They had estimated $9 billion. “Both the sale of AIA and the buyback authorization are meaningfully below both our and consensus expectations.”

AIG declined 1.7 percent to $34.22 yesterday in New York, compared with the 2.4 percent gain of the 81-company Standard & Poor’s 500 Financials Index. The New York-based insurer has climbed 48 percent this year. Jim Ankner, an AIG spokesman, declined to comment.

Investors were expecting AIG to sell more of its AIA stake, John Hall, a Wells Fargo analyst, wrote in a research note yesterday. The plan “fails to maximize the full capacity of AIG’s potential liquidity” and indicates a slower pace of buybacks, he wrote.

AIG sold 591.9 million AIA shares at HK$26.50, according to a statement. AIA closed at HK$26.30 yesterday. AIG spun off AIA, its main Asian unit, in a 2010 initial public offering.

Benmosche’s Plan

AIG Chief Executive Officer Robert Benmosche, 68, is seeking to wind down the U.S. stake in the insurer four years after a bailout that swelled to $182.3 billion. AIG has raised funds through sales of non-U.S. insurance units, a consumer lender and an asset manager and reduced the Treasury’s holdings to 53 percent from 92 percent.

The insurer may be slowing the pace of AIA sales in hopes that the shares will rise and it will receive more cash in the future, said Meyer Shields, an analyst at Stifel Nicolaus & Co.

“AIG appropriately has a sense of urgency to get out from under the Treasury ownership,” Shields said. “They also want to keep shareholder interests in mind.”

AIA repositioned itself as an independent after losing business during the global financial crisis because of ties to AIG, which would have collapsed without government aid. AIA, the third-largest Asia-based insurer by market value, has delivered eight straight quarters of growth in the value of new business under CEO Mark Tucker, who was hired by Benmosche in July 2010.

Earnings Outlook

The sale of AIA shares and the wind-down of two bailout vehicles holding mortgage debt may reduce volatility in AIG’s earnings. Benmosche is seeking to focus on global property-casualty coverage and U.S. life insurance and retirement products.

AIG cut its AIA holdings to 33 percent in the IPO, which raised about $20.5 billion and priced the shares at HK$19.68. The U.S. insurer raised $6 billion more in March through AIA sales, with shares priced at HK$27.15.

“A lot of shareholders would obviously have preferred them to accept a somewhat greater discount to market price to clear out the stake and use the proceeds to buy back stock,” said Josh Stirling, an analyst at Sanford C. Bernstein & Co. “One of the things it suggests is that they’re not quite as focused on getting out as quickly as certainly I had thought.”

A $5 billion buyback would push Treasury’s stake in AIG below 50 percent and subject the company to regulation by the Federal Reserve as a savings-and-loan holding company, Michael Nannizzi, an analyst at Goldman Sachs Group Inc., wrote in a note to clients.

“At this point, it is unclear how such regulation would affect the company’s future deployment plans,” he wrote.

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