AIG Valuations Low on SIFI, Operating Performance, Restructuring

Alternative Investments Impact AIG Earnings, Core Getting Stable

(Continued from Prior Part)

Declining stock

American International Group’s (AIG) stock has declined by more than 13% over the past six months, mainly due to weak operating performance, higher reserve developments, and declining returns on alternative investments.

The company reported an operating profit in the first quarter of 2016 that was lower than the analyst estimates, mainly due to lower investment income. However, its underwriting income increased, which partially offset the falling valuations on its holdings.

Lower interest rates and falling yields on alternative assets led to lower investment income in recent quarters. This trend is expected to continue for the upcoming quarter, given the current interest rate environment.

Valuations

As they are balance-sheet-driven, insurers are generally valued on the basis of their book values. AIG is trading at a one-year forward price-to-book multiple of 0.7x compared with its peers trading at 1.2x.

At a current price-to-book multiple of around 0.8x, AIG is trading lower than other insurers including Allstate (ALL), Metlife (MET), and Chubb (CB). On a one-year forward price-to-earnings basis, AIG is trading at 11.5x compared with the industry’s 11.7x earnings multiple for the same period. The company’s valuations have remained low due to systematically important financial institution (or SIFI) tag, which brings additional regulation costs.

AIG’s shares appear to be fairly valued given the company’s size, restructuring initiatives, and relatively weak operating performance. There is an expectation of some improvement in the upcoming quarters, although the recovery is expected to be slower than estimated. Improved capital structure, reduced risk, and deployment of fresh capital in the expansion of the company’s core business are expected to boost its profitability in the long run.

Investors can gain exposure to insurance companies by investing in financial sector ETFs such as the Financial Select Sector SPDR ETF (XLF) and the iShares US Financials ETF (IYF).

Browse this series on Market Realist:

• Part 1 - AIG’s Earnings Lower than Estimates on Lower Investment Income

• Part 2 - AIG’s Consumer Insurance Fell on Retirement and Personal Divisions

• Part 3 - AIG’s Commercial Insurance Fell on Lower Alternative Income