In this article, let's take a look at American International Group, Inc. (AIG, Financial), a $78.94 billion market cap company, which is a leading international insurance organization that was rescued by various government entities in the financial crisis of 2008.
Strong brand
Before the financial crisis, AIG focused on growth, doubling its balance sheet to over $1 trillion. Further, net investment income has grown to over $100 billion from 2001 to 2007. But the 2008 episode made the company’s balance sheet and premiums to decrease to half of them. The good news is that AIG's strong brand could make to return to those levels more easily.
Actual business
The actual business of AIG is more concentrated to shorter-tail P&C insurance and has fewer life insurance and non-insurance businesses. To survive, the company had processes of divestitures and other changes. Examples of major divestitures included much of the company’s international life businesses, AIA and ALICO, and its airplane leasing business, ILFC.
P&C insurance
When compared to pre-crisis levels, P&C insurance is now 60% of revenue compared with the previous 45%. We think this is very positive because these products are better than life due to its differentiation.
Management
The management focuses on improving the company’s efficiency, with major emphasize in actual operations rather than acquisitions.
Two strategies, like recapitalization and business sales, helped AIG’s financial health. We think that management’s current view is on the right direction.
Revenues, margins and profitability
Looking at profitability, revenue declined by 10% but earnings per share increased by 13.7% in the most recent quarter compared to the same quarter a year ago ($2.08 vs $1.83). During the past fiscal year, the company increased its bottom line. It earned $6.08 versus $4.27 in the prior year. For the next year, Wall Street is expecting a contraction of 24.3% in earnings ($4.61 versus $6.08) and this is not attractive for investors.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| AIG | AIG | 9.04 |
| GNW | Genworth Financial Inc | 3.89 |
| AFG | American Financial Group Inc | 10.24 |
| HCC | HCC Insurance Holdings Inc | 11.08 |
| AIZ | AssurantInc | 10.12 |
| ANAT | American National Insurance Company | 6.40 |
| Ă‚ | Industry Median | 10.12 |
The company has a current ROE of 9.04% which is lower than the industry median, but it has improved slightly when compared to the same quarter one year prior. Also, it is higher than the ones exhibit by Genworth Financial Inc (GNW, Financial), and American National Insurance Company (ANAT, Financial).In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. American Financial Group Inc (AFG, Financial), HCC Insurance Holdings Inc (HCC, Financial) and Assurant Inc. (AIZ, Financial) are close to those levels.
It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
The company projects a return on equity of about 9% in the long run.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 9.3x, trading at a discount compared to an average of 12.1x for the industry. To use another metric, its price-to-book ratio of 0.7x indicates a discount versus the industry average of 1.08x while the price-to-sales ratio of 1.25x is belowthe industry average of 0.60x. All these ratios indicate that the stock is relatively undervalued.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $15.021, which represents a 8.6% compound annual growth rate (CAGR).
The stock price has risen over the past year and we think the stock still has good upside potential.
Final comment
Despite the decline in revenue, the bottom line was not hurt, and earnings per share have increased.Due to its asset divestitures and its focus to more risk-adjusted returns, we believe the company is on a positive trend.
Moreover, shares are undervalued versus the industry and its historical averages, when trading at less than book. The company’s liquidity, equity levels, and the actual share price make me feel bullish on this stock.
Hedge fund gurus like Mariko Gordon (Trades, Portfolio), Richard Snow (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) bought this stock in the second quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
