Surf's Up: AIG Rides the Wave Today

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An hour and a half into the trading day, American International Group (NYSE: AIG  ) is up 0.5%, with investors confidently shrugging off last week's news of a potentially expensive lawsuit and riding today's market wave.

Hurricanes and job gains
Last Wednesday, news broke that AIG and 10 other insurers were being sued by Public Service Enterprise Group (NYSE: PEG  ) . The New Jersey-based gas and electric provider claims that damage from last fall's Hurricane Sandy far exceeded insurers' payouts of $50 million and is pursuing a total payout of $426 million. 

On a more macro scale, last Friday, the Department of Labor reported that the U.S. economy added 195,000 non-farm jobs in June, easily beating economists' expectations of 165,000. In addition, numbers for the previous two months were revised upwards by 70,000. Unemployment stayed at 7.6%, but only because more people are trying to return to the workforce.

Foolish bottom line
The market wave can clearly be chalked up to Friday's jobs numbers, but what wasn't clear was whether investors would react positively to such seemingly obvious good news.

Ever since the Federal Reserve announced that quantitative easing would start being dialed back sometime later this year, so long as positive economic news continued to roll in, markets have at times reacted negatively to similar news: out of fear that such news meant the end of QE. They were 100% right about that, but with Friday's jobs-driven market boost continuing today, it's possible there's been a shift in the market's thinking, back to a place of "normal," where good economic news is always good news for the stock market.

As for the lawsuit, there's no specific information about how much AIG may individually be on the hook for, but $426 million divided by the number of insurers named in the suit averages out to about $39 million per company.

Assuming AIG loses the suit, and even allowing for AIG's portion to hit $100 million, with more than $49 billion in cash in hand as of the first quarter, the insurance giant should have no problem absorbing the payout in a worst-case scenario. AIG has come a long way since the financial crisis, and investors have good reason to be confident in the insurer's balance-sheet strength in this instance. 

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Related Tickers

9/30/2016 4:02 PM
AIG $59.34 Up +0.94 +1.61%
American Internati… CAPS Rating: ****
PEG $41.87 Down -0.24 -0.57%
Public Service Ent… CAPS Rating: ****