Consider the case of American International Group (NYSE: AIG). The company, despite repaying the US taxpayer in full, may have difficulty removing the recent memories of greed and excess from the mind of the American public. In particular, AIG was able to overstate the value of its collateralized debt obligations using improper accounting methods. Because AIG is classified as an insurer, it wasn't required to mark-to-market like most financial institutions.
While it's difficult to make light of the company's former improprieties, a new AIG has emerged from the depths of the crisis that is more focused on growing its global property & casualty insurance business. Wall Street seems to be taking notice, too. For one, the US Treasury's sale of its remaining 234.2 million shares in the company was oversubscribed on Tuesday, indicating strong demand from institutional investors. Hedge funds that hoped to purchase a certain number of shares at the Treasury's $32.50 offering price had their stakes reduced proportionately based on the limited supply.
Looking at the recent SEC Form 13-F filings indicates a number of well-respected money managers have quietly been accumulating AIG shares during the third quarter and calendar 2012 as a whole. Most notably, Miami-based value investor Bruce Berkowitz is likely the largest single holder of AIG, now that the Treasury has sold its final shares.
Here are five reasons why AIG is a priced attractively for long-term buy-and-hold investors:
- Based on recent market prices, AIG's common stock is trading for approximately 60% of book value. In the not-too-distant past, money center banks such as Bank of America (NYSE: BAC) and insurance companies such as AIG were valued at multiple times their total equity. Even a return to conservative 1x book value would bring AIG's share price as high as $55. Similarly, Bank of America's book value is more than $22.
- AIG is also inexpensive on price-to-earnings basis. The insurance giant has roughly an 8 times P/E multiple based on 2012 consensus estimates of $4.25 per share, and management has exceeded Wall Street guidance so far this year.
- The company's liabilities represent an embedded inflation bet. AIG's unpaid claims and future policy benefits are fixed in dollar value. If the ongoing monetary stimulus by the Federal Reserve results in a higher level of inflation down the road, AIG's liabilities will decrease on an adjusted basis. This also holds true for other P&C insurers such as Chubb (NYSE: CB) and The Hartford Financial Group (NYSE: HIG).
- AIG's beneficial tax treatment on net operating losses (NOLs) is positive for shareholders and negative for Uncle Sam. During the fourth quarter and fiscal year end 2011, AIG was able to carry-forward a massive $17.7 billion in tax benefit, accounting for the bulk of its $19.8 billion profit. This unprecedented tax treatment is similar to the preferential status given to Citigroup (NYSE: C) and General Motors.
- The company's recent sale of its aircraft leasing business to a group of Chinese investors allows AIG to focus on its core P&C insurance business. The $4.2 billion sale of International Lease Finance Corp (ILFC) represents the largest Asian acquisition of a US firm.
Let's dive into the valuation on AIG further. Clearly, the market is placing AIG's valuation in between Hartford and Chubb on a price-to-book basis. Chubb is receiving the highest valuation among the group, likely because its conservative management strategy deserves a premium. Furthermore, I recently wrote about Hartford and referenced concerns that regulators have regarding off-balance-sheet transactions.
Similar to AIG, Citigroup is undergoing its own deleveraging process under new CEO Michael Corbat.
As confidence is restored, the price-to-book value of all the financials should recover, even in a slow growth environment.
|American International Group||The Hartford Financial Services Group||Chubb Corp.
||Bank of America||Citigroup|
|Market Capitalization ($)||51.4 B||9.6 B||20.4 B||114.7 B||110.3 B|
|Total Equity (in millions)||81,682||23,370||15,974||238,606||188,738|
|Common Shares (in mililons)||1,476.30||436.31||261.94||10,776.17||2,932.52|
|Book Value ($)||55.33||53.56||60.98||22.14||64.36|
Book value calculations performed by John Macris using recent SEC data.
Foolish Bottom Line
It appears that better times are ahead for AIG shareholders as a smaller, more focused company has emerged. Investors should be rewarded as AIG continues to deleverage its balance sheet and increase market share within its P&C business lines.
In addition, management has already announced a $13 billion stock buyback plan and could institute a dividend in 2013 as the market environment improves. AIG is expected to report Q4 and FY 2012 earnings the week of February 25, 2013.
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