AIG: Uncle Sam's Rescue Child
By Adil Yousuf
For the longest time American International Group (AIG) was branded as America's most unforgettable corporate villain. The company was on the brink of collapse in 2008 following the Lehman Brothers fiasco that triggered the financial crisis. Due to its position of insuring billions in shaky mortgages, AIG needed a massive taxpayer-funded bailout to survive. And, even with Uncle Sam's help, many investors questioned AIG's ability to survive.
But four and a half years later, the poster child of the crisis and bailout has resurged and is now the most loved stock by hedge funds, replacing technology giant: Apple Inc. (AAPL). Back then, who would have thought AIG could survive and prosper, becoming a top favorite stock again?
AIG owes its survival to government intervention1. Without the bailout it's hard to imagine where AIG would be today. While the bailout itself was very unpopular, it did save the company and eventually turned a profit of over $22 billion for the US government 2. After selling off the last set of warrants, the government has finally eliminated its stake in the company.
Over the last few years, AIG reduced exposure to businesses with inadequate pricing and increasing loss trends, resulting in a divestiture of assets worth more than $65 billion. Most recently, the company entered an agreement to sell a 90% stake in ILFC (AIG's aircraft leasing arm) along with a runoff unit - American Fuji Fire and Marine Insurance Co., thereby further consolidating its core operations.
The company unloaded the risky acquisitions that bloated and ruined its balance sheets, and is now focusing on its core businesses that are smoothly powering ahead. AIG's primary subsidiaries - Chartis (property & casualty insurance) and SunAmerica (life insurance) are both producing considerable profits and will play a crucial role in driving growth for the insurance behemoth in the upcoming quarters.
Based on Market IQ's proprietary Fundamental metrics, AIG is expected to Outperform its peer group. Market IQ places AIG in the top right quadrant of the Quality-Value chart (see below), indicating high Quality and Investment Value.
The company's Qualitative strength can be seen in multiple areas, such as its sustainable growth rate and Financial Strength.
- AIG has a sustainable growth rate of 26.75%, which is significantly higher than the industry average.
- Equity to Debt ratio of 0.23 compares favorably to the industry average of 0.17, indicating AIG's strong financial standing in its peer group. A strong Equity to Debt ratio outweighs the fact that the company has relatively weak interest coverage 3.
Among insurance companies, AIG offers average Valuation. AIG is currently trading at a Price-to-Earnings (P/E) multiple of 0.56 and a Price-to-Forecasted EPS (P/F) multiple of 11.44. Both these multiples are relatively in line with the average peer multiple of 0.66 and 11.64 respectively.
Solid earnings from the insurance provider have helped the stock gain a lot of momentum recently. AIG passed $40 for the first time last week since February 2011 and shares are up over 12% this year. For Q4 2012, AIG posted a profit of 20 cents a share much to everyone's surprise. Consensus expectations called in for a loss of 8 cents due to expected damage from Hurricane Sandy. The fact that AIG reported a profit despite a $1.3 billion loss tied to Sandy-related catastrophe claims, speaks for AIG's operational strength. Other positive highlights from the report included operating growth in the life insurance business, higher investment income and strong underwriting margins.
AIG has behaved well under the supervision of CEO, Robert Benmosche, and is really just sticking to playing defence - No more toxic bets 4. With its strong Fundamentals and decent Valuation, AIG promises to be a strong company that is likely to return investors with good capital gains in the years to come. Additionally, if AIG can notch up a few more quarters of healthy earnings, even a long awaited dividend could be on its way 5.
1AIG received $182.5 billion in bailout money from U.S. taxpayers at the height of the financial crisis.
3AIG has an Interest Coverage ratio of 2.63 which is less than the industry average of 8.23.
4 The insurer has restricted itself from making toxic bets like the Credit Default Swaps it issued in 2007 - 2008.
5AIG hasn't paid a dividend since the third quarter of 2008, but consistent solid performance over the upcoming quarters might prompt the insurer to pay a dividend much to the delight of yield hungry investors.
This commentary is for informational purposes only and does not constitute investment advice. The opinions offered herein are not recommendations to buy, sell or hold securities. Market IQ expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.