American International Group
's story is one that pre-financial crisis investors would
prefer forget. The company practically committed suicide by
insuring risky mortgages, then survived on a federal bailout.
However, since repaying the government and relisting as a
public company under soon-to-depart CEO Bob Benmosche, AIG has
transformed itself, growing stronger by becoming smaller.
At the current price, AIG shares could have further room to
run. Here are three reasons why AIG stock might rise:
1. It's getting back to the core business of insurance
AIG has reshaped itself by selling off its noncore businesses. In
2010, it sold American Life Insurance Co. to
In 2012, it ditched $2 billion in
stock. And this year, AIG divested its aircraft leasing
arm, International Lease Finance Corp., or ILFC, to rival
These moves have helped AIG refocus on what it can do best:
underwrite profitable property and casualty, life, and mortgage
Selling ILFC was particularly noteworthy. The deal allowed AIG
to move volatile aircraft leases off its balance sheet, collect
more than $3 billion in cash, and walk away with a 46% stake in
the acquirer. Now AIG stands to profit to the tune of $97.6
million for every $1 increase in AerCap shares without carrying
any of the leases on its own balance sheet -- not bad!
But it gets better. Benmosche said he "expect[s] to improve
our credit ratings," partially due to the credit agencies'
improved opinion on the "new" AIG, which no longer carries
billions in aircraft leases on the side. Only one noncore
business -- the direct investment book -- remains, but it should
wind down naturally by the end of the decade.
2. Shares are backed by a boatload of book value
At roughly $54, AIG stock trades at a nearly 30% discount to its
last-reported book value of $75.71 per share. A reversion to book
value gives the shares 40% upside.
So how does AIG get back to book value? The simple answer is
by generating a 10% (or better) return on equity once again.
AIG's management has targeted a 10% ROE as an intermediate
goal. So far, the company has struggled to meet investor
expectations. Low interest rates have dampened investment returns
on its float. Meanwhile, a competitive pricing environment for
insurers leaves AIG to underwrite at prices nearing breakeven
(this quarter, AIG noted that pricing growth in its commercial
lines had stalled). Still, the company's combined ratio sat at
98.8% in its property and casualty division on a calendar-year
The company is showing slow, sustained improvement in P&C
insurance lines. Calendar-year combined ratios in this key
segment are trending lower, year after year.
Notably, P&C insurance now makes up nearly two-thirds of
company revenue, as new management minimized longer-tail sources
of risk (workers' compensation and catastrophe risks) following
the financial crisis.
Continued improvement in the core P&C business could be
the sole driver pushing AIG back to the days of consistent
double-digit ROEs. It won't be easy, but investors should take
solace in the fact that the P&C division's former president,
Peter Hancock, will take the helm as CEO on Sept. 1. Improving
the P&C business should remain a top focus.
3. Buybacks should sustain book value growth
Perhaps the biggest driver for the stock will come from continued
repurchases. In the last year, AIG has signed off on roughly $4
billion in share buybacks, snapping up shares quickly after
announcing its intentions. That policy will likely continue --
and possibly accelerate -- now that the company has sold ILFC and
has ample capital to repurchase shares below book.
Share repurchases at current prices make sense. Rather than
deploy capital into breakeven insurance policies, AIG can
effectively buy $75 of book value for $54 on the open market.
Book value per share grows with each share purchased, and in
doing so, AIG removes the temptation of writing unprofitable
Consider repurchases as a defense against slow and steady
improvements in its core business. Though AIG may continue to
fall flat against its goal of a 10% return on shareholder equity,
repurchasing stock at a discount allows book value per share to
grow, even if operating improvements are slow to develop.
for the next decade
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3 Reasons American International Group Stock
originally appeared on Fool.com.
has no position in any stocks mentioned. The Motley Fool
recommends American International Group. The Motley Fool owns
shares of American International Group and has the following
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