American International Group (NYSE:AIG) still trades at a material discount to book value: 23% to be precise.
Even though the insurance company has grown its book value fairly steadily since 2011, has deployed significant amounts of capital to buy back shares and initiated a quarterly dividend, investors still don't like to get exposure to one of the largest insurance companies in the country.
American International Group always ran healthy insurance companies in the property- and casualty and Life business and both subsidiaries were solidly profitable throughout the financial crisis.
In fact, the 2008 bailout was precipitated by AIG's Financial Products division which pretty much acted like a hedge fund and sold wheelbarrows full of credit default swaps.
CDS are hedging instruments which were largely bought by other financial institutions in order to mitigate bond default risk, but which were pumped up as AIG's cash cow without properly reserving for the underlying risks.
Long story short: AIG was on the brink of implosion because of its Financial Products division not because of its insurance subsidiaries. AIG ultimately hired Chief Executive Officer Benmosche, got recapitalized and sold off non-core assets (ALICO, its stake in Asian insurance giant AIA and airplane leasing unit ILFC).
Return to stability and book value growth-Thanks to Robert Benmosche
Truth be told, a large part of American International Group's recovery is attributable to CEO Robert H. Benmosche who aggressively moved to recapitalize the company, repaid the bailout funds with a profit and returned the company to growth.
More importantly, he gave the company a perspective.
Benmosche has been a good capital allocator, first and foremost. He pushed for share buybacks and took advantage of book value discounts in the 50% neighborhood.
Share repurchases in particular have been a savvy move, that has served American International Group's book value and its shareholders well.
From the end of 2012 to the first quarter of 2014, American International Group's book value per share has grown more than 8% to $71.77 which is not an easy thing to do for a company of AIG's size.
Coming to AIG at the height of the financial crisis and when AIG was facing insolvency, Benmosche took on what was then probably the most hated job in America. However, he kept his cool and quickly earned the respect of investors and analysts.
Even though wide-spread pessimism with respect to AIG's future persists, American International Group remains a fundamentally solid insurance franchise with much more potential to grow its valuation.
Time after Benmosche-A focus on operational improvements
After spearheading American International Group's return to profitability and book value growth, Benmosche is now set to be replaced by Peter D. Hancock, a seasoned insurance professional and current Chief Executive Officer of AIG's property and casualty division. Hancock will take over on September 1 while Benmosche will stay on as an advisor.
Transferring responsibility for AIG is the right move for shareholders at this time. Benmosche has been done everything he could and fundamentally restructured, downsized and rebranded AIG.
But now is the time to focus on the insurance company's underlying profitability and an improvement in combined ratios which requires hand-on insurance experience.
AIG's property- and casualty business, for instance, reported a first quarter combined ratio of 101.2 vs. 97.3 in the prior year. Combined ratios reflect underwriter discipline: A ratio above 100 shows, that the company is not covering expenses and claims with the premiums it is taken in. The result is an underwriting loss which stood at $97 million in the first quarter in the case of AIG.
American International Group's high combined ratios in the property and casualty business, however, are a big chance for the insurance company to create value. If AIG manages under new CEO leadership to push its property and casualty combined ratio in the 95.0-96.0 region, institutional investors would probably feel more comfortable in purchasing AIG and cause higher share prices.
The Foolish Bottom Line
Benmosche deserves credit for his restructuring success at AIG. However, the new CEO is a seasoned insurance executive and, with his background in the property and casualty business, seems to be right man to improve AIG's underlying insurance metrics.
In any case, with a 23% discount to book value, investors are hardly overpaying, but have a lot to look forward to under Hancock's stewardship.