At the current price of $29 per share, the U.S. government’s stake is valued at $30.75 billion. Assuming the public continues to participate in half of each public offering, AIG would have to raise about $15.4 billion to repay the government’s stake, according to the analysts.
AIG should be able to raise this sum through a combination of the proceeds from the Federal Reserve Bank of New York’s sale of Maiden Lane III assets, sale of AIA shares, the initial public offering of its leasing arm International Leasing and Finance Corp. and about $4.5 billion in retained earnings, Newsome estimates.
The stock has also proved to be more resilient, with shares holding up at the $29 level in the last government offering of shares, the analysts noted.
Third, the insurance operations were doing better than expected, as evidenced by the fourth-quarter and first-quarter results.
AIG’s low return on equity compared to its property-and-casualty peers and life insurance peers likely warrants a discount to book value, Newsome argues, but “not necessarily as low as the current multiple suggests.”
Finally, valuations are attractive, with the stock trading at 52 percent of book value versus its property-casualty insurance peer group currently trading at an average 99 percent of book, as well as its life insurance peer group currently trading at an average of 78 percent.
Newsome has a $35 price target on the stock, about a 20 percent upside from current levels, but still only a 58 percent multiple to its one-year forward book value of $60.83.
Earlier this month, Goldman Sachs upgraded the stock to a “buy,” with a price target of $40, citing an improvement in its casualty insurance business, improving risk profile, and higher capital deployment.
Bernstein analyst Josh Stirling has also been bullish on the stock, arguing that the reducing overhang from the government stake will allow investors to increasingly focus on the fundamentals, which have been improving.
—By TheStreet.com’s Shanthi Bharatwaj
Additional News: Government Should Be Out by End of Year: AIG CEO
Additional Views: Should You Still Be With AIG?
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