By Matt Phillips
After shares of bailed-out insurer American International Group Inc. jumped 6.7% yesterday, an analyst at UBS is reminding investors that the increase in AIG’s stock price helps fuel–wait for it–the increase in AIG’s stock price.
That’s because the non-governmental shareholders who own the stock when the U.S. converts its AIG preferred shares to common will get 75 million warrants entitling them to buy more stock at $45 a share over 10 years. Those warrants were out of the money when the arrangement was announced in late September. But shares have risen about 37% since then, and were at $51.35 in Wednesday afternoon trading.
UBS analyst Andrew Kligerman says a $1 increase in AIG’s stock raises the value of the warrants by 40c/share. The warrants are now worth $12 to $13 apiece, Kligerman says. UBS had previously valued the warrants at about $8 to $9 a share back when the stock was around $42 in mid-October.
Another factor that’s boosting AIG shares, according to the UBS, is an increase in the stock price of rival insurer MetLife Inc. AIG got the stake when it completed the sale of an Asian life insurer called Alico to MetLife on Nov. 1. MetLife shares have risen 8.5% since then, meaning AIG’s stake is worth nearly $10 billion.
AIG will use those MetLife shares to help repay its bailout under a plan finalized earlier this month.
Of course, the logic also works in reverse: a drop in MetLife shares hurts AIG, and a decline in AIG shares depresses the value of the warrants.
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