And then there was Sandy…
2012’s performance for either insurer cannot be covered without touching on Hurricane Sandy’s impact. AIG reported a $2 billion dollar hit from the storm, which reduced its earnings by over 300%. In contrast, Allstate’s earnings were only cut by 45% and Traveler’s by 52% due to the storm-related claims from Sandy. And while the differences may seem questionable, consider the following: Even though Allstate has a larger market share of the property and casualty market than AIG (5.12% vs. 4.53%), during the past five years, the good hands of Allstate have been strategically reducing its exposure to the Eastern Seaboard. With as many as 16 states with restrictions on new business or no new available coverage for homeowners, Allstate significantly cut any claims that it would have to have paid after Sandy hit the coast.
So while you may have flinched at AIG’s fourth-quarter loss initially, keep in mind that the impact of one catastrophic event is not spread across multiple financial periods and cannot be directly compared to a competitor’s results.
Are they nutty?
So, most of what we’ve covered so far may not look that great for Wall Street’s pick: reduced premiums growth, lagging stock performance, and increased claims from events. But there is one significant factor that explains why so many money managers are climbing on the AIG bandwagon: book value. AIG has been trading at a discount to its book value per share since 2009. With many investors still wary of the company because of its near-collapse back then, the uncertainty keeps the company’s stock unrealistically low.
| Insurer | Stock Price | Book Value Per Share | Current Premium (Discount) |
|---|---|---|---|
| AIG | 39.01 | 66.31 | (41%) |
| ALL | 47.29 | 42.39 | 12% |
| BRK-B | 103.41 | 76.14 | 36% |
| TRV | 81.2 | 67.31 | 21% |
Source: Yahoo! Finance and companies’ annual financial reports and supplements.
As the table above illustrates, all of AIG’s competitors trade at a premium to their book values, reducing any value play opportunities for investors. Since 2008, AIG’s book value has appreciated by 238% while its stock price has only risen 7.4% — this is precisely why Bruce Berkowitz and others are betting so heavily on AIG. Since the company continues to add value to its books and the uncertainty of the company’s outlook will eventually lift, an incredible opportunity exists where investors can ride the stock as it rises to meet the underlying value of the company.
Golden opportunity
So while Allstate may continue to outpace AIG in the market, the latter may provide a better option for investors willing to stomach its ups and downs before Mr. Market bestows a more accurate valuation upon it.
The article Hedge Funds Love AIG, But This Insurer Crushed It originally appeared on Fool.com.
Fool contributor Jessica Alling has no position in any stocks mentioned, but you can contact her here. The Motley Fool recommends American International Group (NYSE:AIG) and Berkshire Hathaway. The Motley Fool owns shares of American International Group and Berkshire Hathaway and has the following options: Long Jan 2014 $25 Calls on American International Group.
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