AIG May Not Look Great Right Now, But It Has Huge Potential

AIG is surging ahead with much stronger performance in its Property and Casualty Business. Life insurance and mortgage will do very well in the future.

Apr 10, 2014 at 7:09AM

Source: Flickr / tableatny.

With remnants of the financial crisis still connected to its name, AIG (NYSE:AIG) has had to take a lot of bold steps to reshape their business, which at first glance can look pretty messy. Looking deeper, though, it's clear to see that the company's management is making extremely smart moves. Although these moves might not look popular to the market and its short term outlook, they are setting the stage for an extremely solid, safe, and focused competitor in the insurance space.

Focusing on the breadwinners -- and focusing long-term
AIG's property and casualty insurance segment is the cornerstone of its business, making up approximately 65% of its revenues from insurance operations last year. As a result, the company is making the right move in devoting resources to the segment.

With underwriting losses already decreasing substantially in 2013 compared to the previous year, further investment in research and development to improve underwriting standards should lead to even better returns in the coming years.

AIG still has a long way to go in improving their underwriting profits as its combined ratio -- the metric that looks at incurred expenses paid out divided by premiums earned -- still stands well above 100%, meaning the company's insurance business is paying out more than it's bringing in.

While this does not look too good today, it is important to keep an eye on the trend in this ratio: with a renewed focus on insurance combined with increased resources devoted to the segment, a drop below 100% would be a huge milestone and bode extremely well for the company's future profitability.

Going Forward
In spite of all its troubles in the prior years, especially during the subprime crisis, AIG is showing that it's committed to becoming a much more focused company. While the numbers may not look great today compared to its peers, this company still presents an intriguing opportunity that should be watched quite closely.

At a price to tangible book value of 0.7, the market is still heavily discounting AIG, most likely due to a combination of these less-than-great current metrics and future uncertainty. However, smart investors are focusing on the business and the actions of management: by making unpopular moves today, AIG is taking a long-term bet that a simplified, streamlined company down the road will be much more profitable than its current state.

Ultimately, if you combine that with the discounted price that it's been trading at, this could be a huge opportunity for Foolish investors concerned with buying and holding quality businesses for the long haul, with big rewards.

A company that's revolutionizing banking
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Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends American International Group and Berkshire Hathaway. The Motley Fool owns shares of American International Group and Berkshire Hathaway and has the following options: long January 2016 $30 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.

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