Valuation: American International Group (AIG)

Over the next few weeks, I hope to do an individual valuation of each of the components of the Dow Jones Industrial Average.  For a brief overview of the Dow, please see our Glance at the Dow – a snapshot of the valuations on March 10.  When I have completed the individual valuations, I will put together another overview. 

Company Profile:  American International Group (AIG) (obtained via Google Finance)American International Group, Inc. (AIG) is a holding company which, through its subsidiaries, is engaged in a range of insurance and insurance-related activities in the United States and abroad. AIG’s primary activities include both General Insurance and Life Insurance & Retirement Services operations. Other significant activities include Financial Services and Asset Management. AIG’s major product and service groupings are General Insurance, Life Insurance & Retirement Services, Financial Services and Asset Management. Through these operating segments, AIG provides insurance, financial and investment products and services to both businesses and individuals in more than 130 countries and jurisdictions. In September 2007, AIG announced that it has completed the merger of a wholly owned subsidiary of AIG with 21st Century Insurance Group (21st Century). Upon consummation of the merger, AIG acquired remaining 39.3% interest in 21st Century, which AIG did not previously own.  

Business and Management Review 

1) Is the business simple and understandable?

Insurance is a business that is very simple and understandable.  Value investors are taught to love the insurance business because of its tremendous simplicity and its strengths.  Insurance is wonderful because the company is able to take in premiums and invest the funds, keeping the profit on the investments after any claims are paid out.  American International Group is primarily an insurance company and is thus a simple and understandable company.

 2) Does the business have a consistent operating history?

AIG has a long history in the insurance business, and that operating history has remained consistent and constant over its history.  Financially, the company has achieved a positive net income for over 10 years and has paid a dividend for many years.

 3) Does the business have favorable long term prospects?Insurance will always be around, and AIG will likely be a prominent member of the insurance industry despite growing competition from others.  The company continues to seek growth through international ventures, which bodes well for shareholders. 4) Is management rational?

Robert Willumstad has been the Chairman of AIG since November of 2006.  Over that time, the company has had less than stellar performance, though the circumstances of the financial market have had a significant effect on the performance.  Mr. Willumstad seems to have a firm grasp on the company’s issues within the economy and it appears that his strategies for overcoming the credit crunch will help the company in the long term.

 5) Is management candid with its shareholders?

The company has the standard investor relations page, with earnings reports, webcasts, etc.  In addition, the letter from the chairman in the 2007 Annual report indicates honesty between management and its shareholders as they did not try to mask the poor performance of the company in 2007.

  Financial and Value Review 

Defensive:

1) Size of firm

The market cap of American International Group is $110 billion.  Pass.

 2) Strong financial condition

The company’s current ratio (actually we used the total assets and total liabilities instead since this is a financial institution and does not easily lend itself to current ratio use) is about 1.099, below the 2.0 requirement.  Fail.

 3) Earnings stability

The company has had a consistently positive net income for over 10 years.  Pass.

 4) Dividend record

AIG has consistently paid a dividend for over 10 years.  Pass.

 5) Earnings growth

Earnings have grown more than 1/3 over the last 10 years.  Pass.

 6) Price to earnings analysis

With a PE ratio (using our Methods) of 13.05, the requirement of under 20 is met.   Pass.

 7) Price to assets analysis

The Price to Book ratio for AIG is 1.19, lower than our 2.5 limit.  The multiple of PE to PB is lower than our requirement of 50.  Pass.

 Overall

Having passed 6 of the required 7 tests for the defensive investor following Benjamin Graham’s value investing strategy, we believe American International Group may be suitable for the defensive investor.

  Enterprising:

1) Strong financial condition

The company’s current ratio (see defensive investor section on current ratio) is below 1.5.  Fail.

 2) Earnings stability

The company has achieved a positive net income for over 5 years.  Pass.

 3) Dividend record

The company currently pays a dividend.  Pass.

 4) Earnings growth

Earnings are greater today than they were 5 years ago.  Pass.

5) Price

The price is less than 150% of the net tangible assets.  Pass. 

Overall

Having passed 4 of the required 5 tests for the enterprising investor, we feel that American International Group may be suitable for the enterprising investor following Benjamin Graham’s intelligent investor guidelines.

 Valuation:

Our valuation model finds a fair value to be around $81. 

Opinion:

Since the company is currently trading at about $49, we feel it is undervalued at the present time and may be a suitable investment for the defensive or enterprising investor.

 What is your opinion?  Do you agree or disagree?  How do you feel about American Express.  Please let us know by leaving a comment.The author did not hold a position in AIG at the time of publication.  Also, please read our disclaimer and Our Methods.


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5 responses to “Valuation: American International Group (AIG)”

  1. Andrew in Doddsville Avatar
    Andrew in Doddsville

    On May 9th, AIG posted on its website a 159+ page analysis of its credit exposures. A dense read to say the least.

    The current price of $36.44 is 26% below your “buy” price of $49 and suggests, at least to me, that Mr. Market is going crazy or that AIG may have greater problems than you thought. Any thoughts on that?

    Former CEO Greenberg apparently is considering reducing his interest (direct and indirect) to below 10% to establish his unfettered right to comment on the company.

    The stock currently trades at a price which is below the price at which they acquired new capital. Those shareholders can’t be happy.

    Bottom line: it seems like there is more “blood” yet to fill the AIG Street.

  2. Andrew in Doddsville Avatar
    Andrew in Doddsville

    Additionally, the Justice Department yesterday (?) advised the SEC that it wants information on AIG regarding allegations of inflated values of its collateral. It’s my understanding that Justice Department inquiries are not driven by civil litigation.

    If AIG’s risks in the subprime residential mortgage market increase, would it need yet more capital? And if so, wouldn’t this drive the price down further? Personally, I think that we’re getting closer to a price point that Mr. Graham would like.

  3. Andrew in Doddsville Avatar
    Andrew in Doddsville

    It’s now two months after my last post and AIG is trading at around $12 per share.

    AIG is getting closer to a price that might lead to someone to take the firm private — someone like Ace Greenberg.

    If you believe that AIG Financial Products’ CDO’s and other swaps are being battered by the “mark to market” rule and not because the underlying analysis was faulty, then, a buyer might ask: Can we simply play out the various contracts and see if we really end up with a loss?

    Of course, one might also ask: was the risk analysis wrong because it relied on historical default statistics that didn’t take account of the weak credit position of too many borrowers?

    Oh, don’t get me wrong. I think that the stock will further decline.

    Additionally, if AIG Financial Products is spun off, someone is going to make a huge amount of money.

  4. Andrew in Doddsville Avatar
    Andrew in Doddsville

    Well, the sh*t finally hit the fan and AIG Financial Products, which has been making lots of money playing off of AIG’s balance sheet, is covered in it.

    If the stock was at $3.50 when the government took 80% of it, the stock should now be trading at 70 cents a share. It’s lost 50 cents today and I predict will close at around $2.00.

    The key point is that the USG has agreed that AIG cannot go bankrupt. I’m going to wait for the end of the day and then buy.

    Andrew in Doddsville

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