American International Group: A Deep-Value Insurance Investment With Massive Potential
- American International Group still trades at an extremely low valuation compared to its book value and compared to its peers.
- Narrowing the gap between book value and share price likely to be a multi-year story.
- AIG offers investors a massive margin of safety, and remains a Strong Buy for investors capable of playing the patience game.
AIG: How Will The Shift In Focus Influence Investors' Decision To Buy, Sell Or Hold?
- Deutsche Bank rated AIG a "hold" in August and set its share target price at $59.00.
- The company's after-tax operating income was $1.8 billion while in the corresponding quarter of the last year it stood at $1.7 billion.
- After-tax EPS amounted to $1.25 for Q2 2014, whereas in Q2 2013, the company reported an after-tax EPS of $1.12.
- New CEO, Peter Hancock, is altering the business mix of the company and encouraging the use of technology to boost efficiency.
- Analysts predict a median target price of $60.50.
- First we'll explore the features that AIG warrants offer investors, including the exercise price, expiration date, and adjustment formulas.
- Since the warrants are obviously dependent upon the underlying security, we'll walk through a valuation of AIG common stock and its effect on the warrants.
- Lastly, we'll weigh the potential risks associated with the warrants so that you can make a sound investment decision based upon your risk tolerance.
- In this article, we focus on the strengths and weaknesses of American International Group.
- We specifically look at its profitability, income potential and growth prospects.
- AIG's valuation is also put under the microscope, and we compare it to a sub-industry peer, too.
- AIG has presented a quality quarter with higher earnings and better combined ratios.
- Its book value has grown by double-digits year-over-year indicating more growth potential in a cyclical upswing in the insurance industry in the years ahead.
- AIG is a 'get it and forget it' story.
- Buy AIG now at a 30% discount to book value and sell when investors love AIG once again, possibly at a sizable premium to book value.
American International Group: Underscoring Focus On Core Insurance Activities
- The insurance giant has effectively reported a positive earnings surprise in the second quarter.
- The positive results were achieved on the back of improved underwriting activity and one-time gain of $1.4 billion from the sale of its aircraft-leasing unit.
- Life and retirement business segment also registered an increase of 3% in the pre-tax operating income brought in by both its retail and institutional segments.
- Now, the business has become more centered towards its mainstream insurance business.
- The scrip is undervalued and represents an upside potential of 19.50%.
- AIG posted very strong Q2 results last night.
- AIG's underlying strength in all of its businesses prove management has completely turned the company around.
- AIG is simply cheap based on book value, earnings and projected total returns going forward.
- AIG delivered a stellar quarter, reporting EPS of $1.25 on revenue of $8.53 billion. Analysts expected EPS of $1.05 on revenue of $7.72 billion.
- This positive quarterly report cements my conviction in AIG's turnaround.
- In my previous article, I discussed how AIG was positioned to outperform.
- In CEO Robert Benmosche's final quarter, AIG reported excellent results and it remains a buy after his departure.
- Reflecting tighter underwriting standards, AIG's PC unit had a combined ratio of 98.2%, and this quarter is hopefully a return to consistent underwriting profits.
- AIG's life unit continues to grow deposits and assets, and this unit will drive significant growth as rates gradually rise.
- With improving results and an aggressive buyback, AIG should trade closer to book value or $67; I would continue to buy AIG here.
AIG Bonds: A Reward To Risk Ratio Twice As High As The Median Bond Issue
- American International Group Inc. has made a dramatic recovery from the credit crisis and now sports default probabilities at 10 years, which are lower than IBM's.
- AIG ranks in the safest 20% of the strong insurance peer group for maturities of 5 years and over.
- The bonds offer a very attractive credit spread to default probability ratio. This "value ratio" for AIG is double the median for all heavily traded bonds on July 28.
- Numerous one-time items will obscure the company's actual earnings this quarter.
- Expect a big jump in book value per share due to one-time items.
- Traders will make first moves based on the combined ratio of P&C Division. Look for a ratio below 101.2.
- Investors are looking for concrete plans for future capital deployment - but may not get it.
- We're not particular fans of the structural characteristics of the insurance industry -- please, no offense to those working at insurers.
- Still, we think AIG is one of the most attractively-priced insurers. The company is trading at a large discount to book value.
- The company's executive suite knows this and is buying back stock rapidly. We think shares are worth a look despite the challenging industry backdrop.
- AIG announced its CEO Bob Benmosche will retire on September 1 after helping to turn the company around in the wake of the financial crisis.
- Peter Hancock, who has helped to de-risk the Property Casualty unit, will be the new CEO and will continue to take a disciplined approach to risk.
- Still, I expect Life Insurance to be the main driver of results thanks to growing assets and eventually rising rates.
- Even with new management, shares are poised to reach book value of $65 within 12 months, and I would be a buyer here.
AIG Warrants Or AIG Common Shares? An Update On The Math
- The warrants have outperformed the common shares in recent months, but the warrants are still the bigger bargain.
- A sensitivity analysis shows that the warrants are not nearly as risky as a normal call option.
- The warrants are trading at a discount for all the wrong reasons, creating a perfect opportunity.
American International Group: Laughing All The Way To The Bank?
- Positive catalysts vastly outweigh potential downside risks.
- AIG has one of the most appealing risk/reward ratios, not only in the insurance sector but in the entire stock market.
- AIG's long-term warrants are an interesting alternative to AIG's common stock.
American International Group: A Book Value Bargain To Consider Now
- American International Group has performed well this year in light of declining interest rates.
- The stock is cheap on an earnings and book value basis. It should also be bolstered if interest rates start to rise again.
- Sentiment is improving on the stock recently, it is cheap compared to competitors and should have nice upside ahead.
- On Wednesday, Goldman Sachs upgraded AIG to a buy, with a $63 price target, and while this call was a bit late, I believe it is right.
- AIG can use excess capital to repurchase some stock and invest in its growing life insurance unit, which will deliver strong profits as rates rise.
- As rates rise, AIG can earn more income on its investments, and a 1% increase in the Fed funds rate can increase AIG's earnings by $1.50.
- AIG should trade 90-100% of book value as its business improves, which would push shares towards $60-$66.
Yesterday, 3:14 PM
- Insurers (mostly MetLife MET, the others are at least publicly keeping their lips zipped) are not pleased about being subject to capital rules designed for banks.
- The so-called quantitative impact study (QIS) will take input from the insurers as its attempts to figure out the impact on them of the new banking regulations.
- Others of interest include AIG and Prudential (NYSE:PRU).
Mon, Sep. 29, 5:04 AM
- Hank Greenberg's lawsuit against the U.S. government's rescue of AIG (NYSE:AIG) during the 2008 financial crisis is set to begin today.
- The case will center around whether it was legal for the government to pay only $500K for $35B worth in AIG shares, and whether the government was allowed to condition its first $85B loan on an equity stake in the company.
- The six-week trial will also include testimony from the architects of the bailout Ben Bernanke, Henry Paulson and Timothy Geithner.
Wed, Sep. 24, 3:31 PM
- "They took their bitterness out on AIG and wanted to make a big show," says former AIG CEO Bob Benmosche talking about last year's defections of execs to Berkshire Hathaway (BRK.A, BRK.B). "They went over there and, boy, are they really not showing us anything at all."
- Of the exiting rainmakers, Benmosche says they wanted to be left alone to run their own franchises at AIG. "The fact is that they disagreed with a very simple philosophy. We have to be one AIG.”
- After a one-year cool-off period, Berkshire has resumed hiring AIG managers. "The business that they’re picking off is unusually profitable,” says KBW's Meyer Shields. “It’s not hurting Berkshire at all on the underwriting side.”
- Previously: Berkshire makes another hire from AIG
Tue, Sep. 23, 2:49 PM
- Bidding to expand its specialty insurance business, Berkshire Hathaway (BRK.A, BRK.B) hires Brian O'Neill from AIG. It was in April 2013 when Berkshire poached four AIG execs - including P&C head Peter Eastwood - for its new operation.
- Berkshire quickly hired about 15 more from AIG, with "war" breaking out between the two companies. A truce - with Berkshire agreeing to halt the poaching for a year - was agreed to ... that was about one year ago to the day.
Fri, Sep. 19, 12:13 PM
- Jay WIntrob's exit from AIG (AIG -1.9%) could hardly be considered a surprise after he was passed over to lead the company in favor of Peter Hancock. Nevertheless, leadership continuity stands for something, and Wintrob played a big role in the bounce in profits at AIG's Life and Retirement unit.
- The new management structure, says Wells Fargo, suggests the insurer sees itself less as a P&C and Life firm, and more of a commercial segment and consumer segment firm.
- Previously: Peter Hancock puts his stamp on AIG's management team
Thu, Sep. 18, 4:42 PM
- "We are steadfastly working toward the goal of One AIG," says new CEO Peter Hancock. "We have learned that a federated business model exposes us to the weakest link in the chain."
- Exiting AIG after a 25-year career is Jay Wintrob, president and CEO of AIG LIfe & Retirement, and once thought to be the heir apparent to Bob Benmosche. Out after five years with the insurer is Michael Cowan, EVP and Chief Administrative Officer.
- Among those serving on the newly established Operating Committee is just-hired Chief Information Officer Philip Fasano. Hancock has made clear his belief that investments in technology will yield a big payoff for the company.
- Sources: Press Release, Press release
Wed, Sep. 17, 3:16 PM
- Leading markets higher as the reality of higher interest rates gets nearer is the financial sector (XLF +0.9%). Whether its banks, brokerages, or insurers, a higher benchmark rate for some time has been considered a key bullish catalyst. An especially large move is being seen in the online brokerage names who have been forced to forego money market fees for years thanks to ZIRP: E*Trade (ETFC +3%), Schwab(SCHW +3.2%), Ameritrade (AMTD +2%).
- Morgan Stanley (MS +1.8%), Bank of America (BAC +1.2%), JPMorgan (JPM +0.9%)
- U.S. Bancorp (USB +1.1%), Regions Financial (RF +2%), New York Community Bank (NYCB +0.8%), Huntington Bancshares (HBAN +1.3%), KeyCorp (KEY +1.3%)
- MetLife (MET +0.6%), Voya Financial (VOYA +0.7%).
- Chubb(CB +0.4%), AIG (AIG +1.1%), Hartford (HIG +0.8%)
- Financial sector ETFs: XLF, FAS, FAZ, UYG, KRE, VFH, KBE, IYF, KIE, IAT, SEF, IYG, IAK, FXO, KBWB, FNCL, RKH, QABA, FINU, KRU, KBWR, RWW, KBWP, RYF, KBWI, KRS, FINZ
Mon, Sep. 15, 1:11 PM
- The role is key one for AIG and its new CEO Peter Hancock, who - prior to becoming CEO and now - believes investment in technology will pay large dividends for the insurer.
- Named today to the role is Philip Fasano who joins AIG from Kaiser Permanente, where he held the same position. He'll report directly to Mr. Hancock.
- Source: Press Release
Mon, Sep. 8, 7:30 AM
Thu, Aug. 28, 8:16 AM
- CEO until the end of this month, AIG's Bob Benmosche tells Bloomberg's Betty Liu he moved up his plan to step down after a dire cancer prognosis gave him a year or less to live. The cancer is stable for now, he tells Liu.
- Peter Hancock takes over on September 1.
Wed, Aug. 27, 3:04 AM
- Federal judge Thomas Wheeler has turned down a U.S. bid to dismiss a more than $25B lawsuit filed by former CEO of AIG (NYSE:AIG) Maurice "Hank" Greenberg.
- The government's bailout in 2008 took an initial 79.9% stake in AIG and conducted a reverse stock split, diluting existing shareholders. Starr had been AIG's largest shareholder with a 12% stake.
- Greenberg's Starr International sued in 2011, stating that the $182.3B bailout of AIG was an illegal taking and violated its due process rights.
Thu, Aug. 21, 11:43 AM
- Hedge funds are having a difficult time of it again this year, up 1% vs. a 7.5% gain for the S&P 500, according to Goldman Sachs, which crunched the numbers on 775 funds with $1.9T in AUM.
- Nevertheless, Goldman's list of 50 stocks which "matter most" to hedge funds has outperformed the S&P 500 on a quarterly basis 66% of the time since 2001. The stocks this quarter (posted in order of the number of funds in which a name is a top-10 holding):
- ACT, AAPL, FB, AGN, AAL, GM, TWC, AIG, MSFT, HTZ, CHTR, MU, WMB, LNG, C, DAL, HCA, APC, CBS, ALLY, GOOGL, APD, NRF, BAC, EBAY, LBTYK, PCLN, VRX, BIDU, DTV, DISH, DG, EQIX, MA, WAG, ARCP, GILD, LINTA, MON, FOXA, VC, AMZN, BRK.A, BRK.B, SUNE, CMCSA, JPM, MIC, CCI, HES, LAMR.
- A special call-out to Northstar Realty (NYSE:NRF), Visteon (NYSE:VC), SunEdison (NYSE:SUNE), Macquarie Infrastructure (NYSE:MIC), and Lamar Advertising (NASDAQ:LAMR) for making the list of hedge fund hotels despite their relatively tiny market caps.
Wed, Aug. 13, 3:44 AM
- Berkshire Hathaway (BRK.B), (BRK.A) has hired two senior executives from AIG's (NYSE:AIG) Asia operations to boost its insurance business in the region.
- The company has recently put a large effort on expanding its businesses by moving beyond its core reinsurance operations. In July, it entered the fiduciary insurance business and hired AIG's VP of fiduciary liability.
- Additionally, Berkshire Hathaway Specialty Insurance, the company's commercial insurance business, is applying for licenses from regulators in Sydney, Hong Kong, Singapore and Europe.
Tue, Aug. 12, 7:28 AM
- Q2 adjusted net income of $212.4M or $1.29 per share vs. $67.1M and $0.59 one year ago, thanks to the ILFC purchase.
- Net interest margin earned on lease assets of $550.8M vs. $160.1M. Net interest margin as a percent of average lease assets of 10.1% vs. 8.5%.
- Adjusted debt to equity ratio rises to 3.7:1 from 2.6:1 following the ILFC deal.
- AER +2.3% premarket - pleasing to AIG, the owner of nearly 100M shares, or 46% of AerCap.
- Conference call at 9 ET
- Previously: AerCap beats by $0.50, beats on revenue
Wed, Aug. 6, 7:18 AM
- AIG agrees to the purchase of Ageas Protect from Belgium-based Ageas Group for about $305M. The deal is set to close in Q4.
- Ageas Protect offers term life, critical illness, and income protection coverage to U.K. consumers. It's been around since 2008 and a 4.8% share of new protection business in that country, producing premiums of £91.8M in 2013.
- Source: Press Release
Tue, Aug. 5, 9:08 AM
- Calling his appointment as next CEO of AIG a "vote for continuity," Peter Hancock tells earnings call listeners there will be no abrupt change in strategy at the company when he takes over on September 1.
- The stock has given back some its big premarket gain as Hancock speaks of "pricing pressures" as likely to constrain continued improvements in the company's loss ratio for the remainder of the year.
- Earnings call presentation slides
- Shares +1.8% premarket
- Previously: Parting gift from Benmosche as AIG beats and boosts buyback
AIG vs. ETF Alternatives
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