What Is AIG’s Fair Value?

-0.48%
Downside
78.36
Market
77.98
Trefis
AIG: American International Group logo
AIG
American International Group

AIG’s (NYSE: AIG) operations have generally been getting smaller since the global financial crisis. The company saw its revenue decline by 5.4% in 2017, mainly due to the soft performance of the General Insurance segment. Divestitures and strategic actions on underperforming business lines also drove down segment premiums by 10%. However, the Life & Retirement segment delivered strong results. Driven by growth in the Pension Risk Transfer (PRT) business, the largest contributor was the Institutional Market sub-segment, which saw impressive 464% year-on-year growth.

The news of the Validus acquisition helped boost AIG’s stock price, but only for a short time. The stock has largely been declining since the start of February, and currently hovers around $55, but is that price sustainable? Our valuation dashboard suggests that the current market price may be somewhat cheap. Below we discuss how we estimate AIG’s valuation. Detailed steps to arrive at our price estimate and the revenue calculations are outlined in our interactive dashboard, and you can modify our assumptions to arrive at your own price estimate for the company.

 

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We have a price estimate of $67 for AIG, which is ahead of the current market price. This is based on a revenue forecast of $50.4 billion. The Validus acquisition will expand the company’s general insurance portfolio. With commercial property insurance potentially set to rise in 2018, largely due to catastrophes in 2017, AIG will benefit from having a partner that has deep expertise in this area. Also, with the deal, AIG will enter the crop insurance business, which should generate additional premiums. Further, Talbot, an operator in Lloyd’s insurance market, will re-introduce AIG to complex, but profitable underwriting areas. We expect these factors to reverse the trend of negative revenue growth in the General Insurance segment.

Furthermore, we expect AIG’s earnings margin to improve in the near term. After posting a worse-than-expected loss in Q3’17, the CEO of the company said that the company would focus more on technical underwriting, especially in General Insurance. With Validus’ underwriting expertise, AIG has a chance to improve its underwriting practices. We forecast Net Income of about $5 billion, or adjusted EPS of about $5.41.

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