American International Group Inc.'s financial position remains relatively stable, according to a report released last week by the Government Accountability Office.
Meanwhile, an insurance analyst issued a report warning that the troubled insurer's publicly traded shares are “grossly overvalued.”
According to a client note from Cliff Gallant, an insurance analyst at Keefe Bruyette & Woods Inc.,
AIG still faces significant challenges as it strives to recover from being bailed out by the federal government in 2008.
The GAO, which is the auditing arm of Congress, said that the insurance giant has been on a fairly even keel since its last report on
AIG in September. The GAO noted that the outstanding balance of government assistance provided to
AIG is $129.1 billion, which is about $8.4 billion more than the balance Sept. 2.
SIGNS OF IMPROVEMENT
AIG's core insurance operations are showing signs of improvement, the GAO reported.
“For the first time since the second quarter of 2008, additions to AIG life and retirement policyholder contract deposits have exceeded withdrawals. AIG's property/casualty companies also have shown some improvements,” according to the report.
However, the insurer continues to operate in a market environment where property/casualty rates are declining, according to the GAO.
The report noted that AIG is making progress in repaying government debt, but much of that debt has been converted into preferred equity.
“Consequently, the government's exposure to AIG is increasingly tied to the future health of AIG, its restructuring efforts and its ongoing performance,” the report said.
ANALYST DOWNGRADE
Meanwhile, Mr. Gallant recently downgraded his outlook for AIG shares in a note to investors.
“Under the current ownership and capital structure, we see little long-term value in the common shares, despite the strength of the underlying franchises,” he wrote.
Mr. Gallant, who now rates the shares as “underperform,” wrote in his report that Keefe Bruyette's $6 target price for AIG shares is “optimistic and somewhat implausible, requiring an exit of government interests which we believe may not be executable. Without a significant and unusual change in the company's financial and ownership structure, we view a runoff scenario as still realistic.”
Mr. Gallant previously had rated AIG shares “market perform.”
“Would AIG be in business today without government aid?” Mr. Gallant asked in the note.
“Or consider [president and chief executive Robert Benmosche's] public admission that selling all of the pieces of AIG would not be enough to fully repay AIG's debts,” he wrote. “Doesn't this imply negative real worth, despite a positive book value calculation?”
Mr. Gallant said that “one of the few routes viable and therefore most likely” is conversion of the government-owned shares to common shares, a process that he said would be difficult to execute.
“The process would normalize the ownership structure; but even with all forms of government debt gone, AIG's capital structure would remain highly leveraged, likely putting the company under rating agency pressure, in our view,” he wrote.
“Would the company avoid bankruptcy but still essentially have to go into runoff, unable to write new business? The past destruction of real equity value may yet still prove to be too much to overcome, in our view,” Mr. Gallant wrote.
An AIG spokesman declined to comment about the assessment.
Judy Greenwald and Gavin Souter are senior editor and managing editor, respectively, at sister publication Business Insurance.
