AIG & Hartford Book Value Metrics - Which To Use?

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 I've been looking into ways to get exposure to the insurance industry, and have narrowed the search to two companies: AIG (NYSE: AIG) and The Hartford Group (NYSE: HIG).  Both appear to be compelling investments at first glance.

AIG provides a range of insurance and financial services.  The company received a huge bailout during the financial crisis and is now a hedge fund darling that is either loved or hated by the investor community.  The stock sports a great PEG ratio of 0.95 and has a mountain of cash on it's balance sheet. The Hartford Group is a much smaller company that also provides various insurance and financial service products.  The stock has flown under the radar, but is up over 14% this year.  The stock also sports a PEG ratio of 1.2.  Both companies are also buying back debt to shore up their balance sheets.

While researching these companies, I was struck by an interesting metric that both companies report.  Both AIG and The Hartford report both a “Book Value Including AOCI” and a “Book Value Excluding AOCI.”  After some research, I learned that AOCI stands for Accumulated Other Comprehensive Income.  Essentially, this metric includes unrealized gains and losses from non-core activities such as cash flow hedges and actuarial gains and losses.

Each company addresses which of the two metrics they suggest be used in their 10-K:

“We believe Book Value Per Share Excluding AOCI is useful to investors because it eliminates the effect of non-cash items that can fluctuate significantly from period to period, including changes in fair value of our available for sale portfolio and foreign currency translation adjustments.” – AIG Q4 2012 Form 10-K

“The Hartford believes book value per diluted common share excluding AOCI is useful to investors because it eliminates the effect of items that can fluctuate significantly from period to period, primarily based on changes in market value.” – The Hartford Q4 2012 Form 10-K

But after additional digging, I found an academic study that was done by Dr. Doron Nissim at Columbia Business School in 2011.  His study concluded that excluding AOCI from insurance company valuations worsened the valuation accuracy.  It is typical for insurance company analysts to use the book value ex. AOCI because, as both companies mention above, the AOCI metric can be volatile, and excluding this value helps stabilize the valuation metrics.

The tables below present the book values for AIG and Hartford, including and excluding AOCI for year-end 2011 and 2012.

<table> <tbody> <tr> <td> </td> <td colspan="3"> <p>Book Values (excluding AOCI)</p> </td> </tr> <tr> <td> <p>Company</p> </td> <td> <p>December 31, 2012</p> </td> <td> <p>December 31, 2011</p> </td> <td> <p>Percentage Change</p> </td> </tr> <tr> <td> <p><strong>AIG</strong></p> </td> <td> <p> $57.87</p> </td> <td> <p> $50.11</p> </td> <td> <p>15%</p> </td> </tr> <tr> <td> <p><strong>Hartford</strong></p> </td> <td> <p> $40.79</p> </td> <td> <p> $41.73</p> </td> <td> <p>-2%</p> </td> </tr> </tbody> </table>
<table> <tbody> <tr> <td> </td> <td colspan="3"> <p>Book Values (including AOCI)</p> </td> </tr> <tr> <td> <p>Company</p> </td> <td> <p>December 31, 2012</p> </td> <td> <p>December 31, 2011</p> </td> <td> <p>Percentage Change</p> </td> </tr> <tr> <td> <p><strong>AIG</strong></p> </td> <td> <p> $66.38</p> </td> <td> <p> $ 53.53</p> </td> <td> <p>24%</p> </td> </tr> <tr> <td> <p><strong>Hartford</strong></p> </td> <td> <p> $46.59</p> </td> <td> <p> $44.31</p> </td> <td> <p>5%</p> </td> </tr> </tbody> </table>

Those who are bullish on these companies should like the idea of book value including AOCI being more accurate because it has grown faster than the company’s book value excluding AOCI.

Keep this study in mind when looking at valuations of insurance comparisons in the future.

ahokiealum has a position in AIG. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: Long Jan 2014 $25 Calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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