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I’m Putting More Real Money on AIG

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Three weeks ago, I bought shares of AIG (NYSE: AIG  ) for my Special Situations portfolio. I liked the low price to book value, the company's huge buybacks of stock, and improving business fundamentals. We saw those factors continue in the latest quarter, but shares have sold off since the report. So I'm going back for more on the next market day, doubling my position in the insurer.

As I outlined in my original buy article, AIG is trading at huge discount to its book value. While the stock went down on its quarterly report, its book value per share has gone up 29% since year-end, rising from $53.53 to $68.87. All of that translates into a price-to-book ratio of just 0.46 -- that's cheap.

A big reason for that increasing per-share book value was the company's repurchase of $8 billion in stock from the U.S. government in the latest quarter. For the year, AIG has repurchased $13 billion. Those year-to-date buybacks have raised book value by $6.47 per share alone. That's on top of the company's improved fundamentals. And with 16% of shares still in the government's hands, there may yet be opportunity to buy more shares from an eager seller.

For the quarter, the company recorded net income of $1.9 billion, compared to a loss of $4 billion in the year-ago quarter. Some of that increase was because there was no hurricane in this year's third quarter, in contrast to Hurricane Irene in 2011. The combined ratio showed meager improvement, landing at 105% vs. 105.9% last year. I'm still looking for that to improve over time so that the company has fundamentally good underwriting (i.e., combined ratio under 100%).

But other fundamentals did improve clearly: Pricing was up in its property and casualty operation, for example. AIG also saw a profitable performance from its aircraft leasing business. AIG considers that a non-core asset and is looking to take the business public, though a private buyer might swoop in before it's unleashed on the market.

Shares may have been hurt by the impact of Hurricane Sandy, but CEO Robert Benmosche assured investors, "It's fair to say that whatever the number is it won't be a problem for AIG." That remains to be seen, but the steep discount to book value should help insulate the stock somewhat.

Other future catalysts could well propel shares, including more buybacks and the initiation of a dividend. Benmosche said that he would like to pay a dividend in 2013 if regulators and AIG's financials allow it. But more important is the company's credit rating, which it is working to maintain and improve.

Foolish bottom line
AIG continues to have many of the features that I like in my special situations -- buybacks, forced selling, and improving fundamentals. With the stock's decline, I'm going to add another $1,000 to this position on the next market day.

Interested in AIG or have another stock to share? Join me on my discussion board and follow me on Twitter (@TMFRoyal).

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