"We feel like a start-up company with 64K employees," AIG chief Bob Benmosche tells Barron's. Up 57% since the start of 2012 vs. a 29% gain for the S&P 500, AIG - writes the magazine's Jack Hough - has plenty of room to run and could double in the next five years.
The key is valuation - at just 0.76x book value, AIG trades at a significant discount to peers thanks to far lower ROE. One reason: Roughly one-third of AIG's $100B in equity consists of "financial-crisis leftovers, rather than productive operating capital," writes Hough. Among these items are $10B-$15B of derivatives which have been heavily marked down, are recovering, and set to expire over the next four to five years, $20B in DTAs which will gradually convert to cash as profits grow, and ILFC, whose sale for $6B should close in Q2.
As all that capital frees up, expect it to be used for dividends and share repurchases. AIG recently hiked the dividend and now yields about 1%, but Benmosche prefers buybacks as long as the stock trades so far below book.
Speaking of Benmosche, it's likely he retires over the next year. Shareholders may miss him, but Bernstein's Josh Stirling says it's a good sign: "We just can't think of a turnaround CEO in insurance who left before their story had fully inflected, and left the fate of their legacy in the hands of their successor."