From disappointing operational results to regulatory and macro headwinds, Hartford (HIG) and American International Group (AIG) are rated a "hold" on the Street. I find that these insurers have limited upward potential and carry more risk than reward due to high volatility. Based on my multiples analysis and review of the fundamentals, I recommend holding out for now on both.
From a multiples perspective, both can vary wildly. AIG trades at a respective 2.5x and 10x past and forward earnings while Hartford trades at a respective 8.2x and 5.2x past and forward earnings. The latter's absence of losses, the presence of a dividend yield at 2.3%, and strong liquidity, however, mitigates relative risk. Even still, the company is 200% more volatile than the broader market - 4,000 bps lower than that of its competitor. Hartford has $36.1B in net cash, representing 4.6x market value. This compares with $22.8B in net debt for AIG, which stands at 47.4% of market value.
At the third-quarter earnings call, AIG's CFO, David Herzog, noted disappointing performance:
Third-quarter loss… is $4.1 billion that compares to a loss of $2.5 billion a year ago in our operating income, which is our principal non-GAAP measure was a loss of $3 billion for the quarter versus $114 million a year ago.
Slide eight is highlights of what Bob really covered with the AIA share price decline, the ILFC impairments, the spread widening in the some lower interest rates, the lower liable rate drove some of the loss on ML III and obviously cap losses, so we will move fast, as I think Bob covered that.
SunAmerica had operating profits that were less than half of what was anticipated as premiums and investment income both declined. Book value further fell by 7% sequentially while AIA had a $2.3B drop in the carrying value. Considerable uncertainty further looms around FP RemainCo. The company is further in the process of purchasing back shares from the the U.S. Treasury, which is dragging down on value.
Consensus estimates for AIG's EPS forecast that it will turn positive at $0.78 in 2011 and then grow by 219.2% and 7.6% more in the following two years. Of the 8 revisions to estimates, half fell for a net change of -9%. Assuming a multiple of 7x and a conservative 2012 EPS of $2.43, the rough intrinsic value of the stock is $17.01, implying 32.6% downside.
Hartford similarly had weak third-quarter performance due to macro pressures. Low treasury yields, combined with volatile capital markets, substantially limited earnings. DAC unlocking adversely impacted wealth management as capital and property casualty magnified weakness even more. Management is further reserved about share repurchases. With that said, results were roughly in line with October guidance - hence, again, there is greater visibility in this insurer.
Consensus estimates for Hartford's EPS forecast that it will decline by 38.1% to $1.79 in 2011, and then grow by 87.7% and 11.6% in the following two years. Assuming a multiple of 7x and a conservative 2012 ESP of $3.31, the rough intrinsic value of the stock is $23.17, implying 31.8%. Since there is significant volatility, however, which way the multiple moves is largely a matter of speculation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
