AIG Sells Aircraft Leasing Unit To Double Down On Core Insurance Business

AIG (NYSE:AIG) has announced the sale of 90% of its stake in its aircraft leasing division, International Lease Finance Corporation (ILFC) for $4.23 billion. ^[1] The insurer expects to complete a deal with an investor group comprising of New China Trust Co. Ltd., China Aviation Industrial Fund and P3 Investments Ltd in the second quarter of 2013. The deal is part of AIG’s effort to restructure its operations to focus on its core insurance business.

The aircraft leasing division reported pre-tax losses of $792 million and $1 billion in 2010 and 2011 respectively primarily due to high impair charges and accounted for just $4 billion of AIG’s $65 billion revenues in the last year. The fact that the business contributed so little to AIG is probably why the management agreed to sell it for just about two-thirds of its $8 billion book value. The sale will help streamline AIG’s core operations, particularly in the property and casualty division.

Our $34 valuation of the AIG’s stock is in-line with the current market price.

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Property And Casualty Is The Star

AIG’s primary breadwinner is the property and casualty division which accounts for almost 60% of the company’s revenues and EBITDA. In comparison, U.S. life insurance and retirement solutions premiums account for just 6% and 2% of the net revenues respectively. Judging by these numbers, it is easy to see why we believe that the P&C division is the single most important business for AIG, following reinvestment of insurance premiums.

We’ll go into a bit of history here. Following the 2008 financial crisis which crippled the company and forced a $182 billion bailout, the largest bailout received by a private company during the financial crisis, AIG renamed its international P&C operations from AIU Holdings LLC to Chartis. The motive behind this change in nomenclature was to dissociate the operations from the parent company which had fallen in the public’s eyes. Public anger against the company reached a peak in 2009 when AIG announced plans to allocate $1.2 billion for employee bonuses, including $165 million in executive bonuses.  ^[2]

In response, AIG undertook a plan to restructure its operations to repay loans from the government. The plan included the divestiture of non-core assets such as Japan-based life insurance subsidiaries, AIG Star Life Insurance Co., Ltd. and AIG Edison Life Insurance Company, which were sold to Prudential Financial (NYSE:PRU) in 2010. AIG also sold American Life Insurance Company (ALICO) to MetLife (NYSE:MET) for approximately $16.2 billion and 67% of its stake in American International Assurance through an initial public offering in October, 2010.

The initiatives undertaken by CEO Robert Benmosche have proved quite successful as the company has repaid the debt it owed to the tax payers and has reduced the U.S. Treasury’s share in AIG from 92% to 16%. The Treasury has recently announced its intention to sell its remaining 234 million shares in AIG. ^[3] AIG has also wind-down its derivatives portfolio from investments of $1,800 billion in 2008 to $190 billion at the end of 2011, greatly reducing risks to prevent a future disaster.

Following the restructuring process, AIG has been able to regain the public’s faith. It achieved a growth of nearly 10% in premiums earned by the property and casualty division in 2011. The management has in fact decided to rebrand the division to AIG Property and Casualty, reflecting the public faith that the company has regained. We expect AIG to maintain the momentum it has been able to amass, coupled with expansion in emerging market like India, which is expected to increase the level of foreign direct investment allowed in insurance, we expect a steady increase in AIG’s share in the international property and casualty market.

Losses From Sandy

AIG estimates losses around $1.3 billion from Superstorm Sandy which hit the East Coast of the U.S. in late October. ^[4] This is no surprise given that 5% of the company’s direct premiums come from the State of New York, which was worst affected by the storm. We expect AIG to take a hit in fourth quarter earnings, with a residual effect on 2013 operating margin. However, with the assumption that there are no major catastrophes like Superstorm Sandy and Hurricane Irene in the coming years, we expect the operating margin to return to its historical average.

AIG is of course a global company and is exposed to natural calamities across the world. The Tohoku Catastrophe in Japan and the earthquakes in New Zealand last year had a big impact on the top line last year. However, by considering the historical average, we are accounting for potential disasters that might take place in the future by taking estimates from damages caused in the past. You can modify the interactive chart below to gauge the effect a change in margins will have on our price estimate.

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1. AIG Announces Agreement to Sell up to 90 Percent of International Lease Finance Corporation (ILFC), 9^th December, 2012 [↩]
2. American Inconscionable Group, Fox Business, March 17^th, 2009 [↩]
3. American International Group, Inc. : U.S. Treasury to Sell Its Remaining Shares in AIG, 4-traders, 10^th December, 2012 [↩]
4. AIG’s Sandy losses overshadow unit sale news, BusinessWeek, 10^th December, 2012 [↩]