Still Room for This Turnaround to Run

Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

American International General (NYSE: AIG) has been in "turnaround" mode since the U.S. Treasury orchestrated a $700 billion bailout of the insurer back in 2008. But in December 2012, the U.S. Treasury sold its remaining stake in AIG, so what's the future catalyst to drive the stock higher? It appears the company has refocused on insurance and is now, once again, one of the top players in the industry. 

Despite having outperformed the S&P 500 by over 100% year-to-date, I believe the rebound in AIG still has room to run. 

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AIG is one of the top sellers of workers compensation, professional liability and property coverage products. Part of the insurer's realigning is based in the sell-off of non-core assets. Back in late 2012, AIG also solid off its minority stake in the Asian life insurer, AIA, for a cool $6.5 billion. AIG also recently extended its deadline for the sale of 90% of its ILFC airline-leasing business for $4.8 billion to July 31. 

Just over 50% of its net premiums were written in the Americas, with 19% in Europe, the Middle East and Africa, and 30% in Asia -- leaving plenty of room for international expansion. The commercial-to-consumer premiums are also well balanced at 60% to 40%. 

In addition to the ILFC and AIA asset disposals, AIG has gotten rid of over 40 assets for some $65 billion over the past few quarters, which includes ALICO and Nan Shan (Asia), AIG Star and Edison.

Major comps 

XL Group also offers insurance, reinsurance and other financial services. Gross premiums for XL stacks up as follows, with insurance accounting for 69%, reinsurance 27% and life operations 4%. Its insurance business includes general liability and other liability coverage. The company's net investment income continues to be strained due to low interest rates. Net investment income was down 11% in 2012, down 4% in 2011, down 9% in 2010 and down 21% in 2009. 

Chubb (NYSE: CB) is one of the largest U.S. property-casualty insurers, operating in the high-end personal lines (primarily homeowners insurance) and specialty liability lines coverage.

Chubb's property-casualty operations include personal lines (35% of net written insurance premiums), commercial insurance (44%) and specialty insurance (21%). 

Unlike AIG's exposure to the international markets (50% of premiums), Chubb only derived 25% of its premiums from outside of the U.S. This is a negative given the recent catastrophe experiences in the U.S., including Superstorm Sandy. But the positive for Chubb is the expansion of its personal auto business into the Western part of the U.S. 

Are you in good hands? 

Allstate (NYSE: ALL) is the second-largest U.S. personal-lines property-casualty insurer. Allstate reported 1Q EPS of $1.35 versus $1.42 for the same period last year but beating consensus by $0.06. Operating return on equity was up to 11.3% at the end of the 1Q, versus the 5.4% from a year ago.

The company's primary business is the sale of private passenger automobile and homeowners insurance, with a market share of 11% in each of these lines. Of the 2012 premiums written, standard automobile policies accounted for 64%, non-standard automobile policies 3%, homeowners coverage 24%, and other was 9%.

One of the big drawbacks for Allstate's portfolio includes less liquid assets, where at the end of 2012 mortgage loans and limited-partnership interests made up over 12% of its invested assets.

Hedgie trade

If we use hedge fund interest as a gauge for how the market feels about our insurers, there's no doubt that AIG is the huge favorite to win out over the near term. AIG had over 145 hedge funds long the stock going into the second quarter. This includes Bruce Berkowtiz's Fairholme Funds, which owns the largest stake among major hedge funds, with a $3.3 billion position 

Meanwhile, both Chubb and Allstate only had 32 hedge funds long the stock at the end of 1Q. The hedge fund interest represents a 3% decrease from the previous quarter for Chubb, but a 14% increase for Allstate. Also worth noting is that Allstate calls billionaire Ken Griffin's Citadel Investment Group its top fund owner, with a $317 million position. 

Bottom line

AIG trades well below some major peers on a price-to-book ratio. 

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I believe that AIG still has room to move higher thanks to valuation, industry tailwinds and the company's renewed focus on the insurance industry after shedding non-core assets. While XL, Chubb and Allstate have their strengths in the property-casualty space, I think the stock growth is limited for them given their "rich" P/B ratios, but they pay dividend yields of at least 1.8%. 

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Marshall Hargrave 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 January 01 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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