This Leading Global Insurer is a Long Term Buy

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One of the biggest insurance companies on the market, AIG (NYSE: AIG), has recently reported a loss of nearly $4 billion in its fourth quarter earnings results, due to Hurricane Sandy and the sale of its airplane leasing business unit. In February, AIG has fallen from $39.45 to $37 per share. However, in the past 12 months, its share price has advanced by more than 29%. Is AIG a long term buy after its fourth quarter earnings results?

A Fourth Quarter Losses but Improving Business Fundamental

In the fourth quarter of 2012, AIG’s net loss was $4 billion, or $2.68 per share, compared with net profit of $21.5 billion, or $11.31 per share, in the fourth quarter last year. For the full year 2012, the net income came in at $3.4 billion, or $2.04 per share, just less than a fifth of the 2011 net income at $20.6 billion, or about $11 per share.

The significant reduction in AIG’s net income in the fourth quarter and full year 2012 was due to two main reasons. First, AIG booked around $2 billion pre-tax catastrophe losses from Hurricane Sandy. Second, the net loss on the sale of International Lease Finance Corporation (IFLC) was around $4.4 billion. However, its operating income has improved significantly compared to 2011. Its Insurance operating income has grown from $4.4 billion in 2011 to nearly $6 billion in 2012, while the change in fair value of AIA and ML III has increased to $2 billion and nearly $2.9 billion, respectively. Thus, within a year, the after-tax operating income has more than tripled from $2 billion to $6.6 billion.

At the end of 2012, AIG agreed to sell 90% of its stake in aircraft leasing business to a Chinese consortium for as much as $4.8 billion. AIG bought IFLC in 1990 as it thought that the long life of aircraft assets could be matched the maturities of its life-insurance policies. AIG was one of the big financial giants that received a $182 billion bailout from the US government. Now, the $182 billion has been fully repaid, with the government realizing a profit of nearly $22.7 billion. AIG has been quite active in divesting its non-core businesses. In addition to the IFLC sale, the insurer has raised nearly $6.5 billion by selling the Asian life insurer AIA. Indeed, the divestiture of its non-core businesses will help AIG to regain its focus on its core global insurance businesses. 

AIG Should be Worth At Least $70 per share

At the current trading price of $37 per share, AIG is worth around $57.7 billion on the market. The market is valuing AIG at only 0.56x book value. Bruce Berkowitz once commented that AIG was “picking up pennies in front of a steamroller.” According to him, a business like AIG should be trading at a multiple of the book value. Thus, at lease AIG might reach its book value of around $66.38 per share. He said, “Maybe that happens in the $70s or the $80s, I don't know. But it gets about there. We‘ll see. And companies such as AIG can trade at a multiple of book value. But I don‘t want to go there yet. Just getting to our estimate of book value will be a very nice return for shareholders.”

Peer Comparison

Compared to its peers, including Allianz SE (NASDAQOTH: AZSEY) and AXA (NASDAQOTH: AXAHY), AIG seems to have the cheapest EV multiple. While AIG is valued at only 0.56x price-book ratio, the P/B of Allianz and AXA was 0.93x and 0.67x, respectively. Allianz, with a trading price of $13.50 per share, is worth nearly $61 billion on the market. AXA is the smallest among the three. With nearly $40 billion in the total market cap, its share price stays at around $17 per share. Among the three, AXA is paying the highest dividend yield at 4.3%. Allianz is paying 3.2% dividend yield, while AIG is not paying any dividend at the moment. Furthermore, AXA seems to have the most conservative balance sheet, with a 0.2x debt/equity ratio, while the debt/equity ratio of Allianz and AIG are 0.6x and 0.5x, respectively.

Foolish Bottom Line

With the divestiture of the non-core units, AIG will come back with much stronger revenue and profits from its core insurance business. As AIG is valued the cheapest at nearly 60% discount to the book value, AIG is definitely a long-term buy at its current price. 


hoangquocanh 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 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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