AIG Revisited

It’s time to revisit our investment in American International Group (AIG) – a turnaround candidate for the company that became famous for its role in the 2008 financial crisis; re-focused itself on its core business, and has proved to be a great investment; but still has a lot of work to do.

At A Glance:

Symbol: US-AIG
Price: $64.14
Market Cap: $85.50B
Yield: 0.78%

Investing in the company has been extremely profitable since we made our first investment nearly 3 years ago – nearly doubling the return of the S&P.  Waiting 9 months and investing at the time we first posted about the company, would have still returned a very acceptable 45%.

AIG  vs. S&P: 12-Oct-12 to 3-Aug-15

AIG vs. S&P: 12-Oct-12 to 3-Aug-15

AIG vs. S&P: 6-Jun-13 to 3-Aug-15

AIG vs. S&P: 6-Jun-13 to 3-Aug-15

 

One of main reasons investing in the company was how much cheaper AIG was compared to its peers (using the Price-to-Book Value ratio).  So, how has the company done since then?

AIG Price to Book Ratio

AIG Price to Book Ratio

At the time of our first post, AIG was trading at $45 and a P/B of 0.66 on a book value of ~$67.  Based on AIG’s latest earnings (just released today!), the P/B stands at about 0.8 – but what’s been great is that the company has been able to grow book value by about 10% a year.  That’s ultimately what has been driving the stock price up (especially this year) – a combination of the growth in book value growth, and investors starting to come around and close the discount gap in P/B between AIG and its peers.  However, the gap totally hasn’t been closed:

Company Share Price Book Value P/B Ratio
AIG $64.14 $79.74 0.80
Chubb $125.74 $70.12 1.79
Travelers $106.94 $77.51 1.38
All State $69.33 $47.96 1.45
Markel $592.94 $564.29 1.58
Sunlife Financial $32.36 $22.17 1.46
Progressive $30.62 $12.26 2.50

P/B excluding AOCI (Accumulated Other Comprehensive Income) – basically excluding any unrealized gains/losses on investments, gets the ratio closer to 0.9.  If I look back at the P/B of the same insurance companies I compared AIG against in 2013, their P/B ratios have gone higher! The main culprit?  AIG’s Combined Ratio – basically the best indicator of identifying how profitable an insurance company’s underwriting is (lower is better):

Company Share Price Book Value P/B Ratio Combined Ratio
AIG $64.14 $79.74 0.80 99.9
Chubb $125.74 $70.12 1.79 85.5
Travelers $106.94 $77.51 1.38 90.8
All State $69.33 $47.96 1.45 89.1
Markel $892.94 $564.29 1.58 83.0
Sunlife Financial $32.36 $22.17 1.46
Progressive $30.62 $12.26 2.50 95.2

Back in 2013, it seemed like AIG was headed in the right direction as all three lines of business had combined ratios under 100.  However, fast forward to today, and we can see that AIG still has trouble consistently getting below the 100 line and why it will consistently be valued at a discount.

AIG Combined Ratios (2011 to Present)

AIG Combined Ratios (2011 to Present)

The Final Word

Despite AIG’s struggles operationally, investing in the company has proved profitable, simply from the discount AIG experienced to its peers.  The company continues to slowly improve (slowly being the key word) – and the gap with its peers should close “eventually”.  The value proposition is not quite the same as it was 2 years ago – when a 30+% gain was almost a guarantee.  Today, assuming a P/B of 0.85-0.9 means there’s only  about a 6-12% gain to be had – which if I were a new investor to AIG, I’d probably pass.  There are likely some better value plays that could provide better potential returns; but since I am currently invested with AIG, two things I am watching for:

  1. Continue to grow book value at 10% a year – this is a must while the company improves operationally.  Even if the company maintains its current combined ratio, growing book value at 10% should have a corresponding effect on the share price each year.  Management has been great with respect to buying back shares while the stock trades at a discount to book value; which also increases book value
  2. Operational Improvements / Combined Ratio under 100 – this is what will truly make this stock fly and rapidly close the discount gap with the AIG’s peers.  They’ve been taking the right steps, but haven’t gotten over the hump of consistently getting under 100 (or even in the low 90s).

As for trades we’ll be doing, if readers remember the various scenarios that we identified (using shares, options, and warrants) when being bullish on a stock:

  • Scenario 1 (holding shares): Hold on to the shares, unless there’s something more attractive to buy
  • Scenario 2 & 3 (deep-in-the-money leaps): I only purchased options up until 2016 – at this point, I’m inclined to take the shares vs. rolling into future years
  • Scenario 4 (warrants): probably one of the most beneficial trades was swapping options for warrants – with this quarter’s announcement that AIG will be doubling the dividend, it’ll likely trigger the dividend clause on the warrants (if AIG can maintain the 28 cent dividend, it’ll drop the warrant strike price from $45 to $40 by the time they need to be addressed in 2021).  Unfortunately, those new to buying the warrants will likely be paying a hefty premium now that the strike price reduction is likely to happen

 

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