AIG Slated To Add Value And Smiles To Its Investors

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Feb 03, 2015

Since the financial collapse of 2008 to which American International Group (AIG, Financial) was one of the chief contributors, and all the consequent public hatred the company garnered for the government bailout, the insurance giant has come a long way. Having paid back all its debt, with interest, to the U.S. government, the company has gone through a successful restructuring process. And despite lingering legal trouble for its former chairman Maurice Greenberg, AIG is a stock that looks terribly attractive in the current market. Let us take a look at some of the factors that make AIG a good buy right now.

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Confidence of creditors

In the first fortnight of 2015, AIG raised $2 billion in debt on very attractive terms. Among other bonds, it sold 40-year securities at an all-time low yield for the company. While the markets always have demand for long-term assets, this sale of bonds showcases the confidence that AIG, once the world’s largest insurer, has managed to again inspire in creditors and investors after its 2008 debacle when the government had to give it a bailout of over $ 180 billion. That the restructuring of the company has been successful is proven by the low cost of capital and creditors’ confidence. According to Matthew Duch, a money manager at Calvert Investments, AIG has “taken steps that give investors comfort they aren’t content on being a zombie company and won’t make the same mistakes they made in the past.”

Macroeconomic factors

A big factor in favor of AIG and other insurance heavyweights such as Aviva (AV, Financial) and ING (ING, Financial) is the much anticipated and eagerly awaited rise in interest rates that are expected to happen towards the end of 2015 or early 2016. Insurance companies are beneficiaries of rise in interest rates since they can generate higher returns on their floating investments. Given the strong growth the US economy is showing (5% increase in real GDP in Q3 of 2014) and unemployment rate declining to its lowest level since June 20083, the US Federal Reserve is expected to raise interest rates in the not-so-distant future.

Earnings and technicals

Like many other companies in the insurance sector, AIG remains severely undervalued. Trading at about 30% discount to book value and with a forward profit/earnings ratio of about 10x, it has performed roughly in line with the sector in 2014. It has, in fact, underperformed most of the broader market, but has managed to stay above the bottom third. However, on an earnings per share basis, it is in the top 10% of the entire market and EPS is forecast to stay at or above current levels4. With a low dividend yield, however, the company is a good investment choice for capital appreciation and not for generating income.

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Stake in other companies

Over the last 6 years, AIG has been trimming its businesses to focus more on its core areas of providing insurance. It still owns a 46% stake in AerCap (AER, Financial), the world’s largest independent aircraft leasing company. The lockout on the sale of this stake starts to expire in bits and pieces this month onwards. How soon AIG will liquidate this stake, currently worth about $3.7 billion is not certain, but whenever it does happen, it is sure to further strengthen the company’s bottom line. Or maybe it will go towards paying for acquisitions the company is making. It began this year with acquiring Ireland’s second largest health insurance provider Laya in a deal whose financial details have not been disclosed. Jay Sheehay, global head of AIG’s health business, said, “Building on Laya Healthcare’s success serving customers in Ireland is an important step in expanding AIG’s Health and Consumer strategies,” an area of focus for the company.5 Besides being good for growth, acquisitions are a good way to make investors sit up and take notice.

Conclusion

AIG is set to announce its quarterly earnings and results on February 12. Analysts expect solid growth in both EPS and revenues. Both technical data and market fundamentals point to a time of growth for the company. Combined with renewed creditors’ confidence and an improving US economy, its valuation should start catching up with the rest of the market in the coming year. And that makes AIG a very attractive stock to buy right now.