In this article, let's take a look at American International Group, Inc. (AIG, Financial), a $75.29 billion market cap company that is a leading international insurance organization, which was rescued by various government entities in the financial crisis of 2008.
Reverting 2008 crisis
The company has a strong brand that could make it return to pre-crisis levels. Before the financial crisis, AIG focused on growth, doubling its balance sheet to over $1 trillion. In 2008 the company’s balance sheet and premiums decreased to half of them.
Nowadays, the business is more concentrated to shorter-tail P&C insurance and has less 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.
Efficiency
The management continues focusing on improving the company’s efficiency, with emphasis on actual operations rather than acquisitions. The strategies of recapitalization and business sales have helped AIG’s financial health. We think that management’s view is on the right direction.
Revenues, margins and profitability
Looking at profitability, revenues declined by 14.18% and earnings per share decreased in the most recent quarter compared to the same quarter a year ago ($0.49 vs $1.33). During the past fiscal year, the company reported lower earnings of $5.21 versus $6.07 in the previous year. For the next year, Wall Street is expecting a contraction of 4% in earnings ($5.00 versus $5.21).
The net income has also decreased, a 66.9% drop when compared to the same quarter one year ago, from $1,978 million to $655 million.
The net margin is ranked higher than 95% of the 186Ă‚ companies in the Insurance - Diversified industry.
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 | 7.13 |
| GNW | Genworth FinancialInc | -8.16 |
| AFG | American Financial GroupInc | 9.37 |
| HCC | HCC Insurance Holdings Inc | 11.96 |
| AIZ | Assurant Inc | 9.12 |
| ANAT | American National Insurance Company | 6.99 |
| Ă‚ | Industry Median | 9.17 |
The company has a current ROE of 7.13% which is lower than the industry median. 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 closer 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.
| Year | ROE (%) |
| Dec-05 | 12.55 |
| Dec-06 | 14.95 |
| Dec-07 | 6.28 |
| Dec-08 | -133.71 |
| Dec-09 | -17.87 |
| Dec-10 | 10.04 |
| Dec-11 | 22.07 |
| Dec-12 | 3.45 |
| Dec-13 | 9.15 |
| Dec-14 | 7.26 |
The company projects a return on equity of about 9% in the long run, trailing the industry average.
Relative valuation
In terms of valuation, the stock sells at a trailing P/E of 10.6x, trading at a discount compared to an average of 13.8x for the industry. To use another metric, its price-to-book ratio of 0.7x indicates a discount versus the industry average of 1.17x while the price-to-sales ratio of 1.20x is below the industry average of 0.62x. 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 $24,549, which represents a 19.7% 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 and in EPS, the stock is trading nearly a 52-week high. The relative valuation showed that shares are undervalued versus the industry and its historical averages, when trading at less than book. The company’s liquidity, equity levels, and the positive trend in share price make me feel bullish on this stock.
Hedge fund gurus like Jim Simons (Trades, Portfolio), Daniel Loeb (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) bought the stock, while Louis Moore Bacon (Trades, Portfolio), Richard Snow (Trades, Portfolio), Jean-Marie Eveillard (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Steven Romick (Trades, Portfolio), James Barrow (Trades, Portfolio), Charles Brandes (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Richard Perry (Trades, Portfolio), Bill Nygren (Trades, Portfolio), David Dreman (Trades, Portfolio) and Donald Smith (Trades, Portfolio) have added the stock in the last quarter of 2014, as well as Third Avenue Management (Trades, Portfolio), First Pacific Advisors (Trades, Portfolio), Diamond Hill Capital (Trades, Portfolio) and HOTCHKIS & Wiley.
Disclosure: Omar Venerio holds no position in any stocks mentioned
