AIG (NYSE:AIG), one of the largest insurance companies in the world, has come a long way since being bailed out by the U.S government in 2008. The company underwent structural changes after suffering huge losses on credit default swaps and has re-emerged as one of the biggest players in the market. An improved outlook from rating agencies (See AIG Gets Some Love from Ratings Agencies with Improved Outlook) and a strong performance in the first quarter of 2012 (See AIG Earnings Climb Due To Fewer Disasters This Year) have contributed to the stock’s climb to its highest price since the onset of the global recession.
We believe that AIG has taken the necessary steps to remedy its business and as such have revised our price estimate for the company’s stock to $30, which is about 10% ahead of the current market price. We expect a strong performance from the company this year as it continues to repurchase shares from the U.S. Treasury. Discussed below are a few key factors which influenced our valuation of the company.
Opportunities in Emerging Markets
AIG has established a strong base of operations in developing economies in Asia and Latin America. With plans for aggressive expansion in countries such as China, India, Chile and Uganda coinciding with a period of economic development, Chartis, AIG’s global property and casualty (P&C) division, is poised for sustained international growth.  Chartis suffered significant losses last year due to a high number of natural disasters such as the earthquake in Japan, but improved risk selection and a fall in natural disasters saw the division report net income of $1 billion for the first quarter of this year. We expect an increase in AIG’s P&C market share as the company continues to penetrate into emerging markets.
Increased Annuity Sales
A heightened emphasis on long-term financial planning has been observed among the youth in the U.S., with employees in their twenties opting for retirement products to guarantee income after retirement (See Hartford Financial Targets Youth To Drive Retirement Plans) This trend, coupled with population growth and the baby boomer generation approaching retirement age, should drive annuity sales in the U.S. over the next few years. We expect AIG to capitalize on its reputation as a leading solutions provider to attract customers looking to secure their financial futures.
Investment in Subprime Securities
As property values across the U.S. fall and mortgage delinquency rates dip below pre-2008 crisis levels, increased investment by AIG in non- government-guaranteed residential and commercial-mortgage backed securities holdings seems to be a calculated risk. (See AIG Ready To Bet Again On Subprime Securities) The company has increased its holdings in the aforementioned securities by over $17 billion since 2010. Despite being a risky proposition, these securities offer high returns as the debt crisis in Europe has dampened yields on investments in the region. Although it was investments in subprime securities that led to a liquidity crisis for the company in 2008,we believe the company is more aware of the risks involved and will be more prudent this time around. The investment of insurance premiums accounts for 33% of our price estimate for AIG.
Speculation Over Greece
Global capital markets are eagerly awaiting the results of the referendum concerning Greece’s potential exit from the Eurozone. The decision will have a huge impact on financial institutions in the region as the sovereign debt crisis continues to intensify. AIG has taken several measures to contain the effects of an exit, should it occur. These measures include the allocation of staff from Argentina, which has experience in dealing with a financial crisis.  The Argentina team was successful throughout the currency crisis in the country and should help AIG sustain its performance in Europe. We will keep a close eye on the developments in Greece and the rest of Europe in the next few months.
Exit From Aircraft Leasing
Additionally, AIG is divesting its plane-leasing operations by selling its stake in ILFC Holdings Inc.  Although the business has been profitable, with more than 1,000 owned or managed aircraft, the company has decided that it is not a part of its core operations and plans to dispose of nearly 80% of its holdings in the next three years. AIG is looking to sell non-essential assets as it seeks to repurchase shares from the government. We expect aircraft leasing revenues to fall in the coming year as the company says adieu to the business.
Overall we believe that AIG’s management has done a good job in turning around the struggling parts of the business and focusing on its core competencies. Better risk management processes and smarter investment decision-making should allow the company to perform strongly going forward.Notes:
- Developing nations such as China and. India represent good opportunities, Chartis Insurance [↩]
- AIG Assigns Argentina Staff to Aid Athens as Crisis Grows, Bloomberg, 1st June, 2012 [↩]
- AIG to Sell More Than 20% of ILFC Plane-Leasing Business in Initial Offer, Bloomberg [↩]