Topping nearly $193 billion in market capitalization before the tech bubble burst in 2000s, the now $31 billion American International Group (AIG, Financial) appears it could be a great value pick. Current operations, meanwhile, indicate otherwise.
More than a year and two months after the Federal regulators removed AIG’s SIFI (systemically important financial institution) or "too big to fail" label, the company has yet to deliver for its shareholders.
Investors who have bet that AIG would generate more business since the company's exclusion from the SIFI label have suffered 34% loss, including dividends, greatly underperforming the S&P 500 index’s +7.84% in the same period.
AIG also had consistently missed analyst estimates in the past year.
In the recent quarter alone, the company registered catastrophe losses in Japan—as the insurer is the largest foreign-based insurer in the country, Hurricane Florence, and California.
Meanwhile, AIG did show some signs of improvement in its combined ratio—an industry-specific metric—whereby its different business segments registered lower year over year figures for the recent quarter albeit still above 100—A combined ratio of less than 100 indicates underwriting income and a combined ratio of over 100 indicates an underwriting loss.
AIG’s all-cash $5.6 billion acquisition of reinsurer Validus should also boost AIG’s overall business.
“Validus is an excellent strategic fit for AIG, bringing new businesses and capabilities to our General Insurance operation, expanding the bench of our management team and deepening our underwriting expertise,” said Brian Duperreault, President and Chief Executive Officer of AIG. “With our global scale and the strength of our balance sheet, I am confident that Validus will thrive within AIG and strengthen our ability to deliver profitable growth for our shareholders as we strategically position AIG for the future.”
Nonetheless, AIG’s book value also has fallen 18% since last year. This made investors further regret jumping ahead early as the company’s stock was already trading at 0.76 times its book value back at the time of the SIFI-label removal announcement, and now just trades at 0.58 times.
Despite these challenges, analysts do expect that AIG’s earnings will bounce back this year and a further doubling of earnings by next fiscal year having had a price target of nearly 50% higher than today’s share price of $38.
Value investor Bill Nygren (Trades, Portfolio) of Oakmark Select meanwhile has slowly reduced his portfolio’s exposure to AIG in recent quarters while Richard Pzena (Trades, Portfolio) of Hancock Classic Value has retained its firm’s exposure since the first quarter of this year.
Going against popular expert estimates, AIG may still be a risky bet moving forward.
The company’s exposure to the recent California wildfires will further test investor’s capacity to tolerate more market price reaction once catastrophe-related costs surfaces. Insured losses are now estimated to be somewhere between $9 to $13 billion for the primary insurers involved.
Disclosure: No shares in AIG.
