AIG Faces Significant Headwinds, But The Stock Is Too Low

Summary

• AIG shares have been a perennial underperformer as the company has faced higher-than-expected insurance losses with a combined ratio frequently above 100.
• Q2 results continue to be messy as catastrophe losses from COVID-19 offset nascent signs of improvement elsewhere.
• However, low interest rates are weighing on the retirement unit.
• While shares are overly depressed, don't expect a return to book value.

It has been a terrible year for American International Group (NYSE:AIG) shareholders with the stock losing over 40% of its value. Indeed, in the low $30s, shares are trading at levels seen in 2012. The stock offers a steady dividend, which due to the share price decline, now yields nearly 4%. It also trades at a substantial discount to book value, but earnings power continues to be poor, leaving investors with a quandary: stay and hope for a turnaround or cut losses. I recommend holding for now while using rallies to sell.

(Source: Seeking Alpha)

Q2 Results Were Mixed

In the company’s second quarter (financials available here), AIG earned $0.66, $0.13 ahead of consensus. On a GAAP basis, it was very messy, and the company lost $9.15 as it took a loss on its sale of Fortitude Re.

AIG sold its 76.6% stake in Fortitude for $2.2 billion. By disposing of this entity, AIG’s balance sheet has less risk to “long-tail runoff liabilities.” The company took a $6.7 billion after-tax loss from this sale, which led to a $4.3 billion reduction in AIG’s shareholders' equity, which excludes accumulated other comprehensive income (AOCI largely arises from when assets that are being held to maturity trade above par). Fortitude reinsures the majority of AIG’s legacy portfolio. So while AIG held onto 76% of Fortitude, it was essentially reinsuring itself. By selling out to Carlyle, AIG has reduced its exposure to its legacy insurance portfolio, though at a steep cost.

Since taking over as CEO in 2017, Brian Duperreault has focused relentlessly on trying to improve the quality of underwriting, which has plagued the general insurance unit ever since the financial crisis. This sale of Fortitude is an effort to close the chapter on that era. However, transitioning into the next era is proving to be anything but

Analyst’s Disclosure:I am/we are long AIG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.