Friday, February 8, 2013

American International Group (AIG)

This past November I wrote here about a "fallen angel" that I've started to buy ( ~$32). A fallen angel, is a company that was once very well regarded/high grade company that has, for whatever the reason(s), become very unpopular and hated by the market. The by-product of that unpopularity and hatred is a very low stock price . AIG, certainly fits that bill. While it's true, some parts of AIG were wildly mismanaged and over levered, that brought " down the house ", the major business lines ( insurance and wealth management ) were performing reasonably well - not withstanding the economic downturn of 2008/9. AIG, was rescued by the U.S. government in 2008. The government was recently fully repaid by AIG to the tune of $200+ billion. Yes, that's billion.

AIG, enlisted the help of retired Metlife CEO, Robert Benmosche in 2009 to fix AIG. Benmosche, who was tending to his vineyards in Croatia ( true story ) agreed, and started on a difficult path to restore AIG to operating health. He and his team have since sold non-core businesses, streamlined operations and restored a culture of pride and leadership at AIG. The market has been slow to recognize the great work that Benmosche and his team have done. The market which usually looks forward into the future, is having trouble getting over the past faults of AIG. The cloud hanging over AIG won't last forever.

Here is a snap-shot of some performance metrics of AIG during the "boom" years of 2002-2007.

Average P/E: 17X
Average ROE: ~13X
Price to Book: 1.7X - 3.0X

AIG's stock price was well rewarded for good corporate performance - as it should be. Fast forward to late 2012/early 2013, and AIG looks like this:

P/E: 8X
ROE: ~6%
Price to Book: 0.56X ( current stock price ~$38, AIG's book value ~ $65 )

Management has set a goal of returning to 10% ROE. As industry conditions improve ( premium pricing is already moving up ) and AIG continues to perform, value will continue to build on AIG's balance sheet. It will be extremely beneficial for current shareholders, if Benmosche continues to buy back stock at prices well below book value. AIG, may not return to the "boom" type metrics, as they are far less levered, but that's not required for us to achieve a well above average rate of return.

It's not hard, with grade 5 math and some conservative inputs, to see AIG's balance sheet grow to $75+/share in book value over the next 2-3 years. Even if the market only rewards AIG, with a 1.3X book multiple ( the 15yr industry average ), then you are looking at a $95+ stock price. A triple, with little downside ( AIG's tangible book value is currently $50 ).This is not an overnight investment, patience is required - like most deep value investments.

Chart forAmerican International Group, Inc. (AIG)

Not risky anymore...

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