AIG Spinoff Might Not Reward Bulls Like Some Think

• The share price of American International Group Inc AIG has appreciated 11.59 percent year to date, reaching a high of $64.54 on July 22.
• Piper Jaffray’s John M. Nadel has maintained an Overweight rating on the company, with a price target of $78.
• Nadel believes that the United Mortgage Guaranty (UGC) unit, which the company intends to spin off, is more valuable on a relative basis and would have only a modest impact on the AIG’s 2017 EPS.

Analyst John Nadel mentioned that several news sources reported during the week of October 26 that AIG was considering the spin-off or sale of its mortgage insurance business, UGC.

“We have long-considered UGC a non-core business within AIG's mix and are not surprised that the company may be pursuing a monetization event for the unit,” Nadel stated.

Nadel estimates the sale price for the UGC unit in the range of $3.5-$4.0 billion, based on Piper Jaffray’s “forward estimates of the operating earnings of UGC and incorporating relative margins and valuation versus peers.”

Assuming the above estimated sale price for the unit, “with no tax consequences from the sale and full redeployment of the proceeds into share repurchases during 2016,” Nadel expects the impact on the 2017 EPS estimate to be in the range of less than 1 percent accretion to 2 percent dilution.

“In short, if our estimated range of value for the mortgage insurance unit is reasonable, the only true rationale for monetizing the unit is to further simplify the AIG business model,” the Piper Jaffray report added.