Members know that we’re not fans of the investment prospects of the insurance industry, but they also know that we have liked American International Group (AIG) for some time. We were saying that shares were attractive as early as November 2012, and we reiterated the opinion that AIG was our favorite idea in the insurance industry in November 2013. Today, the company registers a 9 on the Valuentum Buying Index, and . Shares closed at $53.80 each yesterday.
AIG reported excellent third-quarter results that revealed outperformance relative to expectations on both the top and bottom lines. Third-quarter after-tax operating income advanced 23% to $1.7 billion, or $1.21 per diluted share (up from $0.96 in the year-ago period). AIG noted that it repurchased approximately $1.5 billion of shares during the period (and through October) and authorized additional share repurchases of $1.5 billion. Since we value AIG’s shares above its current market price, we would view any buyback activity as value-creating.
Book value per share grew 15%, to $77.35, while book value per share excluding accumulated other comprehensive income (AOCI) and deferred tax assets (DTA) jumped by a similar pace, to $58.11. There is no reason why AIG should be trading at such a large discount to book value, in our view, particularly given that return on equity is hovering in the high-single-digit range during the first nine months of the year, depending on how you measure it (a, b, c). High-single-digit performance is, at worst, value-neutral, given the insurer’s partial cost of funds (via premiums), which is less than the funding costs of a typical corporate entity beholden to higher-cost equity financing.
a) 8.7%, Computed as Annualized net income (loss) attributable to AIG divided by average AIG shareholders’ equity. Equity includes DTA.
b) 7.5%, Computed as Annualized after-tax operating income attributable to AIG divided by average AIG shareholders’ equity, excluding AOCI. Equity includes DTA.
c) 9%, Computed as Annualized after-tax operating income attributable to AIG divided by average AIG shareholders’ equity, excluding AOCI and DTA.
Our Valuentum Buying Index rating of 9 remains unchanged, and we expect upside to at least book value, which is north of $58 per share. Our fair value estimate of $68 per share is certainly attainable and considers only modest improvement in return on equity and value-generating capacity. Shares of AIG remain our favorite idea in the insurance space.