The Return of American International Group Inc (AIG): Deleveraged, Focused, and Undervalued

The big takeaway from this comparison is that AIG is doing just as well or better than its competitors. Its operating margin is the best in the group, while its profit margin and return on equity are both competitive. This is a result, again, of AIG’s simplification and focus on its three core businesses.

The Commercial Property Casualty business produced operating income of $904 million, and the consumer P&C unit contributed operating income of $292 million. US commercial policies written were up 8.6% in 2012, while consumer policies written increased to 41% of total AIG P&C net premiums written.

The Life and Retirement business generated operating income of $4.2 billion, highlighted by a 50% quarter-over-quarter increase in variable annuity sales to 1.2 billion for Q4 2012. Assets under management increased from $190 billion to $204 billion year over year, an increase of 7%; yields in the unit improved from 5.63% to 6.04% over the same period. Variable annuity sales for Q4 increased 50% from 2011 Q4.

The Mortgage Guaranty unit was essentially break even, contributing $9 million to operating income. The unit is growing nicely though. For the linked 4
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quarters beginning in 2010, new insurance written has increased from $3.3 billion to $7.1 billion to $11.6 billion in Q4 2012. Delinquency ratios have decreased to 8.8%, an improvement of 36.7% from Q4 2011.

The takeaway is that American International Group Inc (NYSE:AIG) is performing quite well. It has a best-in-class operating margin driven by three core businesses, comparable profit margins and ROE to its peers, and has been profitable for three consecutive years.

How undervalued is AIG?

Based on AIG’s improved risk profile and operating performance, particularly relative to its peers, we would expect its basic valuation metrics to reflect comparably with similar publicly traded insurers. On a Forward P/E basis, this expectation is true. Price to Book Value, however, indicates significant upside for AIG shares.

Since Nov. 25, 2011, AIG shares have increased roughly 90% from $20 to $38. This period of time has seen a steady and tight ranged bullish trend, driven by the continuing improvement in AIG’s financials. Based on the price-to-book value ratio, AIG has plenty of room to continue its run higher. Assuming American International Group Inc (NYSE:AIG)’s target price-to-book ratio of 1.0, our price target is $65 per share.

The article The Return of AIG: Deleveraged, Focused, and Undervalued originally appeared on Fool.com and is written by Jay Jenkins.

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