Property and Casualty Leads AIG Recovery
AIG (NYSE:AIG) drew a lot of criticism in 2008-09 due to the magnitude of the government’s intervention. During 2008-09, the government invested $182 billion to keep the company afloat and now owns about 92% of the company. AIG competes with MetLife (NYSE:MET) and Hartford Financial (NYSE:HIG) to provide insurance, annuities and retirement solutions to individuals and corporations around the world.
A lot has happened over the past two years since the government decided to intervene in AIG’s situation. AIG has trimmed down its business, raising over $20 billion by selling a majority stake in AIA Group Ltd. in an initial public offering in Hong Kong. The company also sold ALICO to MetLife for $16 billion. [1]
AIG has also been successful in raising $2 billion in a bond offering, and the government has discussed selling a portion of its stake in the company to private investors in Q1 2011. AIG’s chairman, Robert Miller, said that the company will be looking towards making acquisitions to strengthen the business along its primary product lines. [2]
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The stock has jumped about 22% in the past two weeks and is up about 75% for the year. We maintain a price estimate of $42.63 for AIG, well below current market value.
Will AIG Sprint Ahead or Will the Stock Pause to Catch its Breath?
The Treasury Department sold over $10 billion of Citigroup Inc. shares last week and received roughly $14 billion from last month’s offering of General Motors Co. shares. [1] These sales set an encouraging precedent as the government was able to generate positive value from these bailouts. As a result, the market might anticipate seeing AIG as another beneficiary of this turnaround.
Post bailout, AIG has worked to sell off assets and streamline its businesses. The Property and Casualty business is the largest value driver for AIG and makes up around 42% of the $42.63 Trefis price estimate for AIG.
AIG lost market share to competitors during the economic recession when, due to the size of its bailout package, it attracted negative publicity and witnessed brand erosion. Its market share in the Property and Casualty business fell from 8.2% in 2008 to 7.2% in 2010. We forecast that AIG’s market share in the Property & Casualty business will recover in the years ahead, and reach 7.9% by 2017. However, given the accelerating recovery of AIG, this could be conservative. There could be a 12% upside to our price estimate for AIG if its market share in Property & Casualty business recovered back to historical level of around 10%.
AIG still maintains a strong presence in the US. The company has a strong multi-channel distribution network that will help grow its business and allow AIG to take advantage of an improving macroeconomic outlook.
Though momentum is in AIG’s favor, we maintain a more conservative estimate for the company as we remain cautious regarding the outcome of potential stake sales. If the market responds positively to the government’s efforts to cut its holdings, AIG’s stock could continue its run.
See our full analysis of AIG here
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