After decades of explosive growth, insurance giant AIG (AIG) fell off the top of the mountain. Excessive risk-taking, poor risk management, and the "Great Recession" brought the company to its knees. The stigma of the disaster that was 2008 is covering up a truly phenomenal long-term investing opportunity for the value investor.
At $27.96 AIG is trading at 50% of their tangible book value, which is $55.33 per share. The market cap is around $53 Billion, while their tangible equity is about $105 Billion. Another major reason why the stock is cheap is that the government is by far and away the largest shareholder in the company. Because it is an election year, the government is anxious to divest the stake showing a profit validating their involvement, and proving that they don't intend to be long-term investors in private companies. In addition, financial stocks are still very much out of favor on a valuation basis despite the strong rally they have had thus far into 2012. The stock which just a few weeks ago was trading above $29 is now trading just below $28 after the government announced that they were selling $6 Billion worth of shares, pressuring the price.
These clouds are distorting the picture of a company which has tremendous assets, strong management, and an opportunity to grow its core business lines of Property and Casualty, and Retirement Planning. The "New AIG" is extremely well capitalized, after the government converted their preferred stock to common equity. In fact, they have the highest equity of any pure play insurance company in the world. AIG's two primary businesses are Chartis (P&C Insurance) and SunAmerica (Life Insurance, Asset Management.) In 2011, under extremely adverse market conditions these two companies combined for about $4.6 Billion in Pretax Income.
AIG is in the process of finalizing their repayment of the remaining $8.5 Billion owed to the Treasury, which they are paying with interest of course. To accomplish this they are using $5.6 Billion of the proceeds from selling part of their stake in the Asian insurer AIA, $1.6 Billion from their Maiden Lane Securities held by the Fed, and $1.6 Billion from the sale of their former Alico subsidiary to MetLife (MET), from the funds which have been held in escrow. This repayment will enable the company more flexibility in how they are able to deploy their capital, and will clear up the picture of the company's true financial condition.
Even after the government is paid back they will still be left over with some extremely valuable businesses. ILFC is their airplane leasing business which they are hoping to spin-off in an IPO in 2012 or 2013. They believe it to be worth between $7-10 Billion. After the recent sale of a portion of AIA, AIG still owns 19% of the company, which is worth about $8 Billion at current prices; they can't divest this stake until September 2012. In our estimation Chartis and SunAmerica have the potential to earn between $6-8 Billion after taxes. Keep in mind that this isn't a company that is likely to pay taxes for some time, after dealing with steep losses the last several years.
With a market cap of $53 Billion and subtracting the $15 Billion from ILFC and AIA, you are getting AIG's core business for $38 Billion, which implies a 5-6 P/E on their current earnings power. AIG recently bought back $3 Billion of stock from the Treasury at $29 per share which should increase book value by about the same amount. Moving forward we would expect book value to grow by approximately 8-10% per annum. While we understand that the massive volume of shares the government needs to sell off is likely to depress the share price, we think that it will make sense for AIG to divest their non-core assets to purchase as much of their stock as they could afford, which would be immensely accretive to both tangible book and intrinsic value.
Our estimate of intrinsic value is approximately $60.50, which equates to our estimate of year 2012 year end book value, and is 1.1 times current book. At a current price of $27.96 there is greater than 100% upside, plus compounded gains as earnings grow. To be clear there will be volatility, bad news, and bad press, but for the patient value investor this is the time to accumulate your position, because when the picture clears up, the share price will likely already reflect it.