Mega insurer American International Group (NYSE: AIG ) is best known for its spectacular collapse in 2008 as the company used a government bailout to plug a financial products-induced wound. Despite receiving well over $100 billion in government assistance, AIG shares have performed remarkably well since the bailout as the insurer has shed units and repaid its government borrowings. As AIG stock flirts with $50 per share, it's time to take a look at whether or not this insurance giant remains a good value.
A look at tangible book
In many cases, we can use book value as one of many indicators for the value of a company. However, book value also includes things that can be easier to fluff up, so we're going to look at tangible book value -- which excludes things like goodwill.
In the following table, we can see a price to tangible book value comparison between AIG and two other major insurance companies.
|American International Group||0.7|
|Prudential Financial (NYSE: PRU )||1.0|
|Metlife (NYSE: MET )||1.0|
Looking at this table, AIG appears well undervalued compared to its peers. Based on AIG's current tangible book value, if the insurer were to rise to an equivalent P/TBV valuation as Prudential Financial and Metlife, AIG shares would rise to around $66 each -- an upside of around 30%.
But even tangible book value relies on accounting that values everything at its true value. In AIG's attempt to sell its plane leasing subsidiary International Lease Finance Corp (ILFC), it was revealed that the price AIG was planning to settle for would value ILFC at roughly two-thirds of book value and cause AIG to report a $4.4 billion loss on the sale. But ILFC represents one of AIG's last non-core assets, and its sale may have helped the insurer by allowing it to use the fresh capital to strengthen core businesses or buy back more shares.
For what its worth, the ILFC deal remains in limbo today now that a major Chinese backer has backed out of the deal. In response, AIG is reported to be considering a public offering of ILFC shares.
However, even after pricing in a book value reduction surrounding ILFC, AIG still remains below tangible book value and well below the multiples of its peers; this not even taking into account what overvalued assets may be sitting on the books of rivals.
Additionally, if the market begins to value these insurance companies at a premium to TBV, as would be quite possible with further investor confidence in the industry, then all of these insurers, including AIG, could see a higher share price.
Today's AIG is working on rebuilding itself as more of a core focused business able to generate consistent profits and rebuild some of the shareholder value destroyed in the collapse. While AIG shares may never again see their pre-collapse levels because of the massive share dilution that took place during the bailout, AIG's latest initiatives are a step in the right direction.
In continuing with previous share buybacks, AIG recently launched another $1 billion buyback. But the big news was the reinstatement of the dividend. Granted, it's not much at only $0.10 per quarter, working out to a sub-1% yield.
The dividend, even at its tiny amount, begins to move AIG back into the same category as Prudential and Metlife. Even though the insurers' dividends are in the mid-2% range, AIG's dividend now gives the insurer similar access to dividend-only funds and investors who view dividends as a mark of stability.
Overall, this should be taken as a positive development considering AIG will still have room to raise its dividend in the future to make it more on par with those of peers.
Repairing the image
Even at $50 per share, AIG still trades at valuations lower than those of its peers. While tangible book value is not a perfect measurement of intrinsic value, even after factoring in certain writedowns, AIG compares favorably in this analysis. Given the buyback plans and dividend reinstatement, I continue to see AIG shares as undervalued and one of the best plays in the insurance industry today.
Investors looking to welcome (or welcome back) AIG to their portfolio should take a further look at whether this megainsurer fits with their overall investment strategy, from dividend, growth, and value perspectives.
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