After the storm
American International Group Inc (NYSE:AIG) made the worst possible kind of bet during the credit bubble; the company was insuring banks and other investors against potential losses in subprime mortgage assets, while at the same time loading its balance sheet with all kinds of complex and sophisticated derivatives. That would be like renting your car to Lindsay Lohan on Saturday nights, you can make a few bucks from time to time, but there is just no way it´s going to end up well.
When the crisis exploded, American International Group Inc (NYSE:AIG) was declared “to big to fail,” and the company received a $182 billion bailout from the federal government in order to backstop a crisis that was producing ripple effects all over the global financial system. In some sense, the American International Group Inc (NYSE:AIG) bailout could be considered an indirect way to help many other entities which had purchased insurance from the company.
Then came a long and arduous recovery process, the company reduced its workforce from 116,000 to around 60,000 employees; and it also disposed valuable segments like its Asian life insurance business among others. More importantly, under the new leadership of Robert Benmosche AIG has dramatically reduced its exposure to those toxic and obscure financial derivatives it inherited from the previous administration. The company has completely repaid the government, and it’s now in control of its own destiny.
Source: AIG earnings presentation.
Improving fundamentals
The recent earnings beat, fueled mostly by strong results in the Property Casualty segment, bodes well in terms of the turnaround prospects. Benmosche and his team have focused their attention in increasing profitability for this segment, and they seem to be on the right track judging by recent numbers.
American International Group Inc (NYSE:AIG) Property Casualty reported operating income of $1.6 billion in the first quarter of 2013, compared to $1.0 billion in the first quarter of 2012, reflecting increases in both underwriting income and net investment income. Improved underwriting margins for the segment were driven by a shift in the portfolio mix, the benefits of underwriting improvement initiatives which are enhancing the risk selection process, and higher prices.
Overall insurance operating income was up 28% from the same quarter last year, and bo
ok value per share, excluding accumulated other comprehensive income (AOCI), increased by 12% in comparison to the first quarter of 2012. Now that the company has left its financial problems behind, AIG is free to focus on growth and profitability.
When compared to competitors like The Allstate Corporation (NYSE:ALL), The Chubb Corporation (NYSE:CB) and Travelers Companies Inc (NYSE:TRV), AIG still has plenty of upside potential from a valuation point of view. The P/E is in line with that of other companies in the sector, but since AIG has higher expected growth rate, so it´s cheaper when it comes to PEG ratio – PE adjusted by growth expectations -.
Data from Finviz
The company´s price to book value – PB – ratio is around half the valuation of its competitors. This is probably because investors still have doubts about the company´s financial transparency, it is true that companies like The Allstate Corporation (NYSE:ALL), The Chubb Corporation (NYSE:CB) and Travelers Companies Inc (NYSE:TRV) don´t have the same stigma that AIG needs to overcome, and their balance sheets didn´t suffer as much during the credit crisis. But AIG has made remarkable improvements in that aspect over the last years, so this valuation gap could be exaggerated and on its way to getting reduced over the next years.
Return on equity – ROE- is still below average at American International Group Inc (NYSE:AIG), but management has stated its goal of reaching the 10% level in the middle term. As long as the company continues delivering solid operating performance, that should be only a matter of time.
