AIG: Multiple Highs Without Its Life And Retirement Segment
Summary
- American International Group benefits from their AIG 200 strategy, which enables cost savings and improves profitability.
- Pending spin-off of its Life and Retirement segment related transaction, this will provide the company with a solid $7.3 billion cash.
- Benefits from a number of tailwinds, including its huge share repurchase authorization and deleveraging.
- General Insurance reported a solid increase in adjusted profit after tax, bolstered by rising net premiums written in the second quarter.
Mario Tama/Getty Images News
American International Group (NYSE:NYSE:AIG), trades below its book value per share of $76.73. The pending spin-off of its Life and Retirement segment will increase the company's liquidity, allowing it to fund future dividends, share buybacks, and debt reduction. General Insurance shows a solid trend of profitability. This stock is relatively inexpensive in comparison to its fair value of $90.56 as determined by the Graham number.
Who is AIG?
AIG is a market-leading global insurance company. They provide general insurance, life insurance, retirement solutions, and other financial services to customers in approximately 80 countries, with a long-term focus on general insurance.
AIG 200 Strat
Source1: Investor Presentation
The company has continued to improve its operations since launching AIG 200 two years ago, most notably in the General Insurance segment. AIG 200 consists of ten operational programs, as seen in the preceding image. By the end of 2022, AIG expects to generate $1.3 billion in investment profit and reduce operating expenses by $1.0 billion.
Source2: Company Filings, Prepared by the Author
American International Group was able to improve its combined ratio for general insurance and overall adjusted ROCE as a result of the effective implementation of its AIG 200 strategy, as shown in the graph above. The company has a specific objective of increasing its profitability and liquidity.
+AIG: Deleveraging
Source: Same as Source2
Further examination revealed that as of June 2021, AIG owes a total of $26,161 million in long-term debt. Two months later, in August 2021, the company announced that it would redeem $1.5 billion in outstanding notes due in 2022. This makes AIG extremely liquid until 2022 and can easily be funded with their current $2.76 billion cash position.
Focusing on Its General Insurance
AIG's management is adamant about splitting its Life and Retirement segment as a stand-alone entity via IPO to simplify their business structure. The IPO, according to management, will maximize respective shareholder value and allow the company to remain a market leader.
Source: Same as Source1
In July 2021, AIG agreed to sell a 9.9% equity stake in their Life and Retirement segment to Blackstone (NYSE:BX) for $2.2 billion in cash. Following the closing of the equity investment, AIG agreed to enter into a long-term SMA with Blackstone to manage an initial $50 billion of Life and Retirement existing investment portfolio, with an expected growth of $8.5 billion per year over the next six years, bringing the total investment portfolio up to $92.5 billion. This agreement is expected to be completed in the third quarter of 2021.
In the same month, AIG and Blackstone Real Estate Income Trust (BREIT), affiliated with BX, announced that the latter will acquire AIG's interests in a U.S. affordable housing portfolio for $5.1 billion in cash. This deal is expected to be completed in the fourth quarter of 2021.
Is It Worth It?
Is it really worth it for AIG to let go of its Life and Retirement segment, which accounts for 68 percent of its total assets as of Q4 2020?
Source3: Q4 Financials, Prepared by the Author, Amounts in Millions
In the fourth quarter of 2020, $396,275 million of its total assets were linked to Life and Retirement, with $18,436 million tied up in adjusted equity. Examining its total premium and deposits of Life and Retirement, as shown in the graph below, total deposits grew 84 percent compared to the second quarter of last year, demonstrating an outstanding five-quarter trend.
Source4: Company Filings, Prepared by the Author, Amounts in Millions
Its Premiums are flat at $1,645 million, but it still managed to generate positive figures, as illustrated below.
Despite the economic downturn, AIG increased the adjusted ROCE and adjusted pre-tax income of its Life and Retirement by 16.40 percent and $1,124 million, respectively, over comparable periods.
As of Q2 2021, General Insurance generated $784 million, a 452 percent increase over Q2 2020; a faster rate of growth than Life and Retirement, which grew by 17 percent year over year.
The increase in adjusted profit after tax is due to rising net premiums written, which increased by 24% year over year. At first glance, it may seem illogical for AIG to divest itself from its Life and Retirement segment, the fact that it contributes more adjusted income after taxes than General Insurance. The management's objective, however, is to maintain a laser-like focus with its respective industry.
Pending IPO Is Set to Compete With the World's Largest Life Insurance Companies
Essentially, it is not a typical drop of a low-performing segment spin-off. It will be strategically positioned to compete in the Life Insurance industry.
Source5: Statista
With their current total assets, SAFG (the Life and Retirement IPO) will face stiffer competition. SAFG's bottom line needs to improve in order to remain competitive with peers like Sun Life Financial (NYSE:SLF) and Prudential Financial (NYSE:PRU).
Source6: Seeking Alpha, Prepared by the Author
With the data we have above, SAFG will take time to establish a solid trend toward surpassing the world's leading Life Insurance companies. According to its non-GAAP data, it may have a chance at an adjusted net margin of 18%.
Source: Same as Source4
As long as there is no GAAP data available, I will remain neutral because that 18 percent net margin is still subject to adjustments.
+AIG: General Insurance
Source: Same as Source4
Despite contributing less to AIG's total assets, General Insurance contributes more equity than its Life and Retirement segment. AIG's upcoming (SAFG) IPO will increase its liquidity and shareholder value.
Price Action: Near Resistance, Bullish MACD Crossover
Source7: TradingView
AIG is getting close to the psychological resistance level of $59.09. Over the last six trading weeks, its MACD has already crossed. A healthy consolidation before its breakout will provide investors a quality set-up in the coming weeks. If there is a pullback, investors can use its three simple moving averages to track its dynamic key levels.
Final Key Takeaways
This stock is currently trading below its $76.73 book value per share. Using the Graham number as our valuation metric, we determine that AIG is currently trading at a fair price of $90.56. Its improved liquidity positions it to grow its dividend year over year, which at 0.64 percent per year, will not be a problem over the next two years.
Source8: Seeking Alpha
Another value-adding catalyst is AIG's $6.0 billion share repurchase authorization. With a current share price of $55.48, a total number of shares outstanding of 855.20 million shares, as well as the pending separation of its Life and Retirement businesses, this stock, in my opinion, is poised to hit multiple highs in the coming years. Currently, AIG is trading at an earnings multiple of 11.59x and a forward earnings multiple of 9.05x, making it a bargain that you should include to your watchlist.
Thank you for reading!
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in AIG over the next 72 hours. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (8)
AIG’s been having a great few months.. Restructuring is working and monetary trends are its friends.. I wish BX took the whole company over!
