American International Group Independent As Treasury Unloads Stake

American International Group, Inc. (NYSE:AIG)’s is now finally an independent company. The U.S. Treasury is selling its remaining 16% stake in currently worth $7bn, which is consistent with many forecasts that this transaction could occur by 2012. Unlike previous offerings,  American International Group, Inc. (NYSE:AIG) will not repurchase any stock.  Post the September 2012 secondary offering, U.S. Treasury (UST) held 234m shares, or 15.9% of shares outstanding.

Last night, UST sold 100% of its remaining stake at $32.50 per share. Consistent with management commentary last quarter that it intended to focus capital deployment on driving improvement in its interest coverage ratios (a key focal point amongst several rating agencies), the company did not buy back any stock in the offering.

Barclays attributes this shift to AIG now being Fed-regulated along with rating agency pressure to improve debt service coverage. The
U.S. government exit from AIG is an important milestone, although investors should focus on AIG’s core operating ROE of about 5%, which trails other P&C and life insurers.

AIG is also winding down its remaining ownership of non-core assets including AIA (AIG stake is $6.4bn) and ILFC ($5.3bn sale announced this week).

On the management call last evening, CFO Herzog indicated that the company expects the proceeds from the sale of ILFC to be fully available for deployment, though management did not commit to using the proceeds for share repurchases.  AIG should receive $4.2b or $4.8b in proceeds from the sale – the former if the buyers purchase 80.1% of the company, the latter if they exercise an option to purchase a full 90%.

Also on the mgmt call, CEO of AIG Property Casualty, Peter Hancock indicated that the company’s aspirational 10% ROE objective was set before DAC accounting changes went into effect, altering the ability to defer certain direct marketing expenses.

Given the lack of ability to defer such expenses, mgmt would likely have to adjust its target and expected to lay out further details surrounding this particular issue in the near-term. We’re very interested in further disclosure around this, particularly following comments on the 3Q12 call that indicated, “…we’re absolutely on target from everything we feel right now to 2015 getting to an ROE north of 10%.” Separately, it is important for investors to realize that the 10% ROE objective is based on GAAP equity excluding AOCI and also excluding the deferred tax asset (DTA).

Still Expect AIG to Call $1.1b Hybrids Using Parent Company Resources. AIG has $1.1b of 7.70% hybrids outstanding which become callable on/after December 18th. Despite the $1b capital injection from the Hold Co to the P&C insurance subsidiaries, mgmt indicated it has sufficient Hold Co resources to call the hybrids without monetizing other assets such as its remaining stake in AIA Group Ltd (HKG:1299).

With UST now out of the stock and  American International Group, Inc. (NYSE:AIG) once again a 100% privately held company, many analysts expect mangament will be able to turn its full attention to managing the company to drive improved financial performance and higher ROE. Along these lines, analysts hope to see one or more of the following in the near future: 1) initiation of a common dividend; 2) details surrounding timing and size of expense initiatives; and 3) change to management incentive programs to further align incentives with shareholders.

Among the notable largest shareholders is, Bruce Berkowitz’s Fairholme Capital Management, L.L.C., Dan Loeb’s Third Point LLC, and George Soros’ Soros Fund Management, L.L.C.

Disclosure: No position