Is AIA Group Bruce Berkowitz's Next Big Stock Pick?

| About: AIA Group, (AAIGF)

Bruce Berkowitz's Fairhome Fund has gotten a lot of media coverage for positions in beaten down names like General Growth Properties (NYSE:GGP), St Joe Company (NYSE:JOE), Citigroup (NYSE:C) and Bank of America (NYSE:BAC). But it was probably Berkowitz's most enigmatic position in American International Group (NYSE:AIG) (see: Undervalued AIG warrants) that gave birth to an under the radar position with big potential. Asian insurance company, AIA Group (OTCPK:AAIGF, 1299.HK) could be Fairholme Funds' next top performing stock pick.

Berkowitz' stake in AIA Group doesn't get much attention. The stock is not listed on the SEC Form 13F because it is listed in Hong Kong. According to the Fairholme's 2010 Annual Report (.pdf), as of November 30, 2010, the fund had a stake of 302.2 million shares of AIA Group currently worth $922 million.

Originally founded in 1931, AIA Group is a pan-Asian life insurance company with operations in 15 markets, including: China, India, Korea, Singapore and Vietnam. It was a subsidiary of American International Group up until AIG had an IPO of 67% of AIA Group's shares to repay the New York Fed for assistance during the 2008 financial crisis.

Unlike AIG, AIA Group is a more sought after stock. The shares jumped 17% on the first day of trading. The shares are currently trading 20% above the IPO price of HK$19.68. With 12.044 billion shares outstanding, the company has a market capitalization of $37.65 billion, above the $35.5 billion that Prudential (NYSE:PRU) initially offered in March 2010.

The company's book value as of November 30, 2010 was $19.6 billion on assets of $107.9 billion. Book value at the end of 2009 was $14.9 billion on assets of $90.66 billion. With a trailing price/book value of 1.88, the stock may seem expensive compared to many US insurers like MetLife (NYSE:MET), Hartford Financial (NYSE:HIG), Travelers (NYSE:TRV) and Prudential that trade at price/book values at or below 1.0, the underlying opportunities for life insurance in Asia are much different than they are in mature markets like the US. From 2009 to 2010, AIA Group's premiums grew 12%. As strong as this number is, it could just be the beginning. For example, in 2008, Indonesia spent 1.3% of the country's GDP was spent on insurance compared to the UK where 15.7% is spent on insurance. The general thinking is that as per capita GDP increases, so will percentage of GDP spent on insurance. Berkshire Hathaway's (NYSE:BRK.A) recent deal to act as corporate agent for an Indian insurance operation reinforces the importance of the global insurance markets.

AIA Group is an interesting stock that offers investors focused exposure to the Asian insurance market. While Bruce Berkowitz's large stake in the stock is what caught our initial attention, there are other reasons to take a closer look, including the operational history, growth potential and large sales network. While the current valuation may be justified based on the secular growth opportunities, investors should be mindful of several risk factors. AIA Group's stock price could face headwinds when AIG sells the rest of their stake. With AIA Group's average investment portfolio credit rating of A-, further credit deterioration could be problematic. Return on equity seems low, but this could mean that the company has additional capital to deploy.

Here's more information on other stocks that Fairholme Funds could be buying.

Disclosure: I am long BAC, C, GGP, BRK.B.

Additional disclosure: I am long AIG warrants