ADD: AIG WARRANTS (AIG.WT)
NOVEMBER 9, 2018, (TRYING TO) BUY 3000 WARRANTS OF AIG @ USD$9.10
Today I (TRIED TO) purchase 3000 WARRANTS of AIG INSURANCE. AIG is one of the world’s largest insurers. Over the past few years they have un-reserved against their policies and have had to correct this, multiple times, over the past few years. Investors hold their breath every quarter for further adverse developments on their policies. Q3 earnings were somewhat disappointing, however, there were no reserve surprises and the business overall continues to throw off tons of cash. My warrants allow me to buy AIG common shares at $43 per share at anytime over the next 26 months. The current share price is $44/shr. So, should the AIG common shares trade at $44 in 26 months, these warrants won’t have a lot of value. AIG book value is currently around $55/shr and I believe we will see $70/sh.
NOTE: THE AVAILABLE FLOAT IS SMALL AND AS SUCH, IT TAKES SOME TIME TO PURCHASE THESE WARRANTS. I HAVE A BID IN JUST OVER $9.00.
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JANUARY 13, 2018 – BUY, 2000 Warrants @ USD $19.65
I’ll admit, this is not the first time I have owned a little piece of AIG. I wasn’t a holder when it went bust in 2008, however, I’ve owned it a few times here and there over the years. I like insurance – I’ve always liked insurance. It’s a relatively simple business: you take annual premiums and pay out when your customer suffers a loss; before you pay out, if you ever have to pay out, you invest the premiums. During periods of low interest rates, the return on the invested premiums suffers. Insurers usually are investing in bonds, hopefully matching the terms of their potential liabilities. AIG’s $300 billion ($330 per share) in assets earn a few percentage points a year. At the height of the low interest rate environment in 2015, some folks were discussing the inevitability of mass bankruptcies among insurers and pension funds as returns on investable assets continued to plummet.
In addition to the pain caused by a low interest rate environment, insurers who price their policies too low get creamed. Usually the pain on these policies isn’t felt for a year or two, however, if you’ve been selling insurance at premiums which are far below expected losses, you will need to up your reserves against losses, directly hitting your bottom line. During 2008, AIG was done in by selling insurance against collateralized debt obligations (bad mortgages) for what turned out to be far less than what they needed to be getting.
Since coming out of bankruptcy, AIG has done a good job or righting the ship. The company now sports a book value of $75-$80/per share or around $70 billion. In addition, earnings have approached $10 billion per year. In addition, AIG has purchased 900 million of their own shares, returning nearly $50 billion to shareholders.
Recently, the share price has been taken down to about 80% of book value (the simple value of all assets less all debts). This has been caused by additional reserves against policies written over the past two years. There is a valid concern that insurance business has been written at rates too low in their Property and Casualty business. However, I would also point out that there were major hurricanes in the US in Q3 2017, and many many insurers suffered losses. Investors, however, have grown tired by what has been a regular drumb beat of increased reserves over the past few years.
During management’s talk with shareholders in announcing the Q3 2017 numbers, the CEO went to great lengths to assure shareholders that careful attention is being paid to writing profitable business. We will have to see how they do.
Why am I buying? I’m a value guy and I see value. I have a strong conviction that interest rates are on the way up. I believe the US is gradually shifting from a supply-focused economy to a demand-focused economy and as this continues to roll-out, we should see increasing interest rates. How much? No clue. But if we see 10 year rates of 4%, up from Q3 2017’s 2.4%, AIG’s $300 billion portfolio is worth an extra $4.5 billion per year ($5 per share a year) and we could easily see earnings of $12 billion ($13 per share). More or less.
In addition, AIG has these warrants. I am less excited buying AIG’s common shares; I do like the warrants. The Warrants allow the holder to purchase 1 share of AIG at $44.10 per share anytime before January 2021. Therefore, since AIG’s current share price is $61/share, the warrants are in the money and are worth $17 each ($61-$44). I bought them for about $19.75. I am simply calculating that AIG’s portfolio will be worth much more in a few years than it is now AND that they will not continue to suffer under-reserving issues.