Who Would Have Thought?

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

When most people think of the financial problems during the Great Recession, there are two business names that come to mind. Lehman Brothers is certainly one, but the other has to be American International Group (NYSE: AIG). AIG received over $100 billion in assistance from the government and I honestly believed it when the CEO, Robert Benmoshe, said that he expected to pay back the government “with a profit of at least $10 billion”.

He made this claim back in May of this year, and ironically it seems he may have underestimated the U.S. Government's potential profit. According to Bloomberg, the U.S. already has pocketed a profit of $12.4 billion and still holds about 22% of the insurers’ shares. While it's anyone's guess what will happen with the remaining stake, the AIG bailout may be one of the better investments the U.S. Government has made.

I examined the situation at AIG myself in a prior post, and concluded that there was only one number that mattered: the government's stake in the insurer. At the time, the stock was at $28.96 (it trades about 15% higher today), but I didn't see it as that great of a bargain because the stock was selling for about 11 times estimates and was expected to grow by about 10%. All I can say is what a difference eight months makes. Take a look at the change not only in the company's relative valuation, but also government ownership in the last eight months:

<table> <tbody> <tr> <td> <p><strong>Date</strong></p> </td> <td> <p><strong>P/E on '12 Earnings</strong></p> </td> <td> <p><strong>Growth Expected</strong></p> </td> <td> <p><strong>PEG</strong></p> </td> <td> <p><strong>Government Shares Owned</strong></p> </td> </tr> <tr> <td> <p>February 2012</p> </td> <td> <p>11.01</p> </td> <td> <p>10.00%</p> </td> <td> <p>1.1</p> </td> <td> <p>1.455 billion</p> </td> </tr> <tr> <td> <p>October 2012</p> </td> <td> <p>7.78</p> </td> <td> <p>20.13%</p> </td> <td> <p>0.39</p> </td> <td> <p><span><span><a href="http://www.bloomberg.com/news/2012-09-11/aig-stock-prices-at-32-50-share-as-treasury-cuts-stake.html">317.2 million</a></span></span></p> </td> </tr> <tr> <td> <p>Difference</p> </td> <td> <p>-29.34%</p> </td> <td> <p>+101.30%</p> </td> <td> <p>-64.55%</p> </td> <td> <p>-78.20% </p> </td> </tr> </tbody> </table>

When you see the progress this company has made it's amazing. The elimination of 78% of the overhand in the stock has done wonders not only for the company's image, but also for earnings expectations as well. In fact, relative to its competition you can make a reasonable case that AIG could be a good investment.

Insurance stocks are constantly under scrutiny when there is perceived risk in the economy. AIG is getting closer to becoming a standard insurance company and not just the red-headed stepchild of the government. While it's true that the company can continue to improve its operations, take a look at how it compares to a few of its competitors.

<table> <tbody> <tr> <td> <p><strong>Name</strong></p> </td> <td> <p><strong>Gross Margin</strong></p> </td> <td> <p><strong>Equity-to-Assets Ratio</strong></p> </td> </tr> <tr> <td> <p><strong>Aflac</strong> <span class="ticker" data-id="202746">(NYSE: <a href="http://caps.fool.com/Ticker/AFL.aspx">AFL</a>)</span></p> </td> <td> <p>28.92%</p> </td> <td> <p>0.12</p> </td> </tr> <tr> <td> <p>AIG</p> </td> <td> <p>15.80%</p> </td> <td> <p>0.19</p> </td> </tr> <tr> <td> <p><strong>ING Groep NV</strong> <span class="ticker" data-id="204032">(NYSE: <a href="http://caps.fool.com/Ticker/ING.aspx">ING</a>)</span></p> </td> <td> <p>53.46%</p> </td> <td> <p>0.04 </p> </td> </tr> </tbody> </table>

Between insurance companies, a straight comparison is nearly impossible because most offer a slightly different suite of products. Aflac offers a good yield of about 2.8%, is expected to grow earnings by around 11%, and has a long history of increasing its dividend. The company's gross margin is higher because of its focus on cancer insurance instead of standard property & casualty or life insurance.

ING Group focuses on a much larger swath of businesses, from banking to investments and life insurance. Through an improving economy over the next few years, analysts expect earnings to jump by nearly 19% a year. While AIG can't match either company's gross margin, this is an opportunity for the company.

As AIG becomes more focused on its critical businesses and sheds non-core assets, gross margin should improve. In addition, as you can see its balance sheet is relatively stronger than its competition as shown by the equity-to-assets ratio. Peter Lynch once said that the equity-to-assets ratio was one of the most fundamental measures of the financial strength of a company. Keeping this in mind, AIG is doing very well.

It's amazing to say, but AIG looks like a good value. Shares appear bargain priced relative to their growth rate. AIG's balance sheet is strong compared to its competition. With the company going back to its old insurance self, and shares selling for just 0.55 times book, this looks like a value investors dream.

MHenage owns shares of Aflac. The Motley Fool owns shares of American International Group and has the following options: long JAN 2014 $25.00 calls on American International Group. Motley Fool newsletter services recommend Aflac and 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.If you have questions about this post or the Fool’s blog network, click here for information.

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