A Picture of an Insurer in 2015

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

There are few companies that have attracted the same amount of press as American International Group (NYSE: AIG). After a series of bets went bad, AIG received and later repaid a massive federal loan package totaling well over $100 billion. But the new, independent AIG is leaner than it was before, having sold off business units to raise funds to repay the loan. Still, with estimates from analysts and industry peer comparisons, we can get an approximate feel for what AIG may be valued at by the year 2015.

Earnings basis

After having its balance sheet torn apart by losses and its income statement flooded with red ink during the initial collapse, AIG has once again returned to profitability. But analysts expect earnings at AIG to continue increasing over the next few years providing some positive news for AIG shares.

Company est. EPS 2013 est. EPS 2014 est. EPS 2015
American International Group $4.03 $4.08 $4.80
Metlife (NYSE: MET) $4.74 $5.22 $5.90
Prudential Financial (NYSE: PRU) $5.29 $8.72 $9.77

source: 4-traders.com

Looking at the table, AIG shows some expected earnings growth, but so do industry peers, reflecting higher analyst expectations for the insurance industry in general. Here, AIG does not look that special in terms of EPS growth when compared to peers. If the market values AIG only on an earnings growth basis then it is not clear that AIG shares represent a significant advantage over insurance peers.

Book value basis

One of the biggest arguments in favor of AIG is a low price to book valuation. Analysts have tried to give estimates for insurance company book value numbers over the next couple years as well, and we can see how AIG stacks up in estimates.

Company est. Book value 2013 est. Book value 2014 est. Book value 2015
American International Group  $63.40 $73.90 $80.00
Metlife $56.90 $60.30 $65.90
Prudential Financial $85.80 $93.10 $92.60

source: 4-traders.com

Considering AIG trades well below book value now, this future growth of book value would either mean AIG shares would trade at an even greater discount to book or they would have to move higher along with book value. Some analysts have criticized the measurement of AIG's book value, claiming certain parts of the value are not correctly valued based on current market conditions. While this may be the case for select parts of AIG's book value, AIG may also be trading at a greater discount to book out of investor resistance to owning AIG shares again. As time passes, the fears associated with AIG shares should begin to dissipate, possibly closing this book value gap.

For this reason, AIG shares look to be at an advantage over peers based on book value and its future prospects. While it's only one measure of value, AIG looks ready to outperform peers if the market values the insurer on a book value basis.

Dividend basis

One of the things AIG lacks at this time is a dividend. This puts shares at a disadvantage compared to those of other insurance companies that do pay dividends. Both MetLife and Prudential pay dividends in the two percent range, making them purchasable for dividend-only funds and somewhat attractive as income investments. For AIG, neither of these two categories of buyers has AIG on their radar. At least not yet.

AIG announced an intention to begin a dividend last year although it is unclear when the dividend would begin. The stock appears to be priced without a dividend since none has been declared, but the reinstatement of a dividend in the future could provide a positive catalyst for AIG shares.

Insurance giants

All of the companies mentioned above represent some of the biggest players in the insurance industry. Higher earnings for all three are predicted as well as increases in book value. While insurance companies still face the risks of natural disasters, economic downturns, and additional regulations, most analysts see a bright future for the insurance industry. Investors interested in this industry should weigh their options and determine what goals they have in mind and whether things like a dividend are a requirement in their investing strategy.

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Alexander MacLennan has no position in any stocks mentioned. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. 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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