American International Group Inc. (AIG) and the U.S. Department of the Treasury say they plan to offer a small portion of stock for an unset price in an effort to better understand the underlying value of the bailed-out insurer.
The announcement comes two days after news reports that shares of the company slid to their lowest point in eight months over concerns about whether the U.S. government will be able to make a profit off of the stock sale. Days before that, AIG reported an 85 percent drop in first-quarter net income, primarily due to $1.7 billion in pretax catastrophe losses and a $3.3 billion pretax charge related to paying back debt to the Federal Reserve Bank of New York (FRBNY).
The offering of 300 million shares is valued at nearly $9 billion, based on the price of AIG's stock at the time of the announcement.
The Treasury says it will sell 200 million shares and AIG will issue and sell 100 million shares, according to a statement.
The offering represents a fraction of the 1.6 billion shares the Treasury owns after it finalized a recapitalization plan with AIG in January.
The government is "sticking its toe in the water to see what is out there," says Cliff Gallant, an analyst with Keefe, Bruyette & Woods.
"Once they increase the float [of public shares] and shares are trading, we'll get a better understanding," he adds.
AIG says $550 million of the proceeds of the sale of its stock will be put toward a July 2010 litigation settlement of a securities class-action lawsuit. Any additional balance after the sale will be used for "general corporate purposes," AIG says.
The Treasury authorized 45 million additional shares to be made available depending on demand.
Should the Treasury sell 245 million shares, it would represent about 15 percent of its stake in AIG. The Treasury holds a 92 percent stake in the insurer. After selling 200 million shares, the Treasury's stake would be reduced to about 77 percent, according to a filing with the U.S. Securities and Exchange Commission.
AIG stock reached a high during the first quarter of $62.87, says the SEC filing, but during the second quarter, the price dropped to $29.15 shortly after AIG reported its first-quarter results.
In reporting its results, the New York-based insurer said its net income was $269 million, compared to $1.8 billion in earnings during the 2010 first quarter.
Robert H. Benmosche, president and CEO of American International Group Inc., said at the time that the company is "ready to move forward" and called the first three months a "major quarter," as AIG paid back the FRBNY two years ahead of schedule. The company has deferred tax assets available to offset future tax obligations.
The earthquake and tsunami in Japan, an earthquake in New Zealand, and flooding in Australia accounted for the catastrophe losses during the quarter.
The company's property and casualty unit, Chartis, took an operating loss of $463 million, compared to a gain of $879 million last year at this time, due to the catastrophe losses. The first-quarter combined ratio for Chartis was 119 vs. 102.5 a year ago.
Looking beyond the repayment and catastrophe losses, Benmosche says the "underlying core business is doing extremely well." Operating income rose to slightly more than $2 billion, after tax, which more than tripled operating income posted after the first three months in 2010.
Benmosche says Chartis remains focused on getting the right combined ratio and the right returns. The unit continues to "deemphasize lines that have caused difficulty in the past," says Benmosche, adding that Chartis closed on its transfer of asbestos liability to Berkshire Hathaway's National Indemnity Co.
AIG says it expects to increase operating earnings to between $4 billion and $5 billion by 2015 as well as raise investment income and capital available for mergers and acquisitions and share repurchases.
AIG needs to "demonstrate without any question that we have strong credit ratings," Benmosche says. He adds that AIG needs $3 billion in primary capital to convince the feds it will succeed once the company is off on its own.
"They like us but not that much. They don't want us coming back," Benmosche says.
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