AIG is most famous for it’s role in the 2008 financial crisis meltdown – to which not only did it lose 99.999999% of it’s market cap (I may have exaggerated a bit there), but also required the U.S. government to bail them out to the tune of $182B. When it wasn’t getting itself in trouble providing insurance for mortgage swaps and derivatives, it was your standard insurance company – offering consumer, commercial, and property and casualty insurance; and that’s where the turnaround story begins.
At a Glance:
Symbol: US-AIG Price: $44.86 Market Cap: $66.23B Yield: N/A
Our investment in AIG is based on a spectacular turnaround, a focus back on it’s core business; and hoping to benefit from the stigma investors have of the company as a reminder of 2008.
To get back on track, AIG got rid of anything that wasn’t core business – eliminating nearly all previous exposure to derivatives paying back the government, and even selling its aircraft leasing business to a Chinese buyer. At the end of 2012, the government sold nearly all its remaining holdings in the company – making a tidy $15B profit on the whole ordeal. Today, AIG consists of Chartis (offering property and casualty insurance to commercial clients and consumers) and Sun America (providing domestic life insurance and retirement products).
The world of insurance isn’t complicated – you write policies, collect premiums, invest those premiums, and hope you have less claims and expenses than the money collected. The most important number when evaluating an insurance company is the combined ratio – which is the combination of the loss ratio (total losses incurred in claims plus adjustments over total premiums earned) and the expense ratio (total cost of underwriting, benefits, operating costs, premiums earned). A number over/under 100 means underwriting loss/profit. In the case of AIG, Q1 of 2013 resulted in the company’s first underwriting profit in over two and half years!
There’s no doubt that the company is turning around – a look at the combined ratios across all three lines of business coincides the first profit with all lines of business combined ratios being under 100.
This is an important trend to watch – as long as AIG continues to focus on its core insurance business and continues to make underwriting profits, there is huge potential. Insurance companies have a price-to-book ratio (what’s a price-to-book ratio?) of 1:1. A quick comparison of other insurance companies relative to AIG (take with a grain of salt as the mix of business may be different than AIG’s):
|Share Price||Book Value||P/B Ratio|
|Allied World Assurance Company Holdings, AG||$89.98||$99.11||0.91|
|The Travellers Companies||$81.74||$68.00||1.20|
What’s important to note is that AIG is significantly below its peers – and even if you give it a discount (say maybe a P/B ratio of .85) as it rebuilds its insurance business, you’re still looking at a share price of $57.30 – good for a 30% return – and that’s assuming a discount relative to peers. In the best case at 1:1, that potential return goes north of 50%.
That’s the investment thesis for buying AIG. There are other reasons like potential to start issuing dividends now that it has rid itself of the government’s influence, but the main reason is the turnaround. In my next post, I’ll write about how between me, my wife, and my mom-in-law, we all invested in AIG, but using different mechanisms.