AIG - AIG: Buy The Next Dip On This Mega Insurer With Diverse Asset Portfolio

2023-07-12 22:45:47 ET

Summary

• AIG gets a buy rating today.
• Its positives are competitive dividend among peers, strong financial condition, asset portfolio benefiting from high interest rates, reasonable valuation on P/E and P/B.
• Headwinds: currently trading above its 200-day average, having gone past the dip-buying opportunity in March.
• Risk exposure to office properties in its asset book is acknowledged but remains a small part of the overall asset book, which is mainly fixed-income corporate and diversified.

Research Brief

The other day, in picking equities to research, I asked the question, just what ever happened to that insurance giant that made headlines during the 2008 financial sector "meltdown" amidst losses on credit default swaps & the Federal Reserve Bank of NY stepping in with a $85B rescue package to save it?

Today in summer 2023, I am rating American International Group ( AIG ), a company still alive & well, and due to report its Q2 earnings results in a few weeks on August 1st. The stock is getting a buy rating, and below you will find out why.

Within the financial sector, insurance subsector, this company was in 2022 ranked #10 on the list of top insurance companies in the world, according to Insurance Business magazine .

From info on the company's own website , some notable items of mention on this company are: $527B total assets, 70+ countries, $25.5B in net premiums written, and a portfolio of insurance solutions "including Liability, Financial Lines, Property, Global Specialty, Crop Risk Services, Personal Lines and Accident and Health."

Our Rating Methodology

Our goal is to find value buying opportunities for stocks in the financial & tech sectors, for companies that otherwise have strong financial fundamentals.

We individually rate 5 categories: share price trend, valuation, dividends, financial condition of company, macro factors affecting company.

If we recommend a stock on at least 4 of the 5 categories it gets a buy rating, 3 out of 5 is a hold rating, and less than that is a sell rating.

Share Price Well Past its 200-Day Average

First off, we will talk about the share price and give a recommended buying range and time horizon.

Below is the chart showing the pre-market open price of $58.75 on Wednesday July 12th:

The trends I am watching are the price (mountain pattern) compared to the 50 day SMA (blue line) and 200 day SMA (red line).

This stock was clearly impacted by the March selloff in financial stocks, as were many banks, but I think that low of $47 is behind us and as you can see the death cross formation has reversed and trending back upward, possibly getting ready to form a golden cross soon.

The month of June saw this stock finally break through its 200 day average which provided resistance until then.

This current price is, however, above my target buying range of $52 to $55 (as highlighted in yellow), as my portfolio strategy is looking for dips below the moving averages. Clearly the better opportunity to get in on this stock was March through May. However, you may be of the opinion that the current support line will continue, and no further dips will come again soon.

In terms of a holding timeframe, I use a hypothetical scenario of holding for 1 year, getting in at $52 and getting out at its January peak of $64, achieving a solid return of 23%, while in the meantime also taking advantage of the dividend income and premiums from selling call options. Again, your own timeframe may by longer or shorter, as this is purely a hypothetical simulation.

So, I do not recommend this stock at this time in terms of being a value buying opportunity, but it has potential to be one at the next dip. What could trigger a dip depends, perhaps a negative surprise in the Q2 earnings call coming soon.

Please do share in the comments section your take on the upcoming earnings call and let's have a discussion!

Valuation is Reasonable

For valuation, I will use the GAAP-based forward P/E and forward P/B ratios as reported in Seeking Alpha data . The benchmark I compare to is the sector median.

This stock's P/E is 10.20, just over 10% above its sector median. However, its P/B is just 0.96, roughly in line with the sector median.

By comparison, its insurance-sector peer The Hartford Financial Services ( HIG ) has a somewhat lower P/E of 9.17, but a much higher P/B at 1.50.

Another insurance giant, MetLife ( MET ), has valuation metrics of P/E 10.50 and P/B 1.52.

So in comparison to peers and sector averages, I would recommend AIG in terms of valuation, which appears reasonable at this time.

Dividends Steady and Competitive vs Peers

Next, let's go over dividends. From dividend info on this stock, it is currently offering a dividend yield of 2.45%, with a dividend of $0.36 and no ex-dates coming up soon.

In terms of 5 year dividend growth, it has been flat, with the annual dividend of $1.28 being the same in 2022 as in 2018:

However, in the Q1 2023 earnings release , the company announced a 12.5% increase in the dividend finally. This, I think, is a significant notable item to mention.

In comparison to its peer, The Hartford , which was mentioned earlier, that stock offers a slightly lower yield at 2.32%. Also in the insurance space, MetLife beats the three of them with a yield of 3.51%.

So, since AIG is somewhere between the two in terms of dividend yield, and the fact that it has a history of steady quarterly dividend payments going back to 2013, and has just boosted its dividend again, I would recommend this stock for a dividend investor.

Financial Condition of Company is Healthy

While we wait anxiously for this company's Q2 results in several weeks, for now let's talk about the existing financial condition of this company, using its Q1 results as a reference guide.

Here are some notable items that show this company is in healthy financial condition:

The first item that gets attention is the 12.5% increase in the dividend, which shows the company has the cash to return back to shareholders, always a good sign, along with its ability to buy back its own shares, which it also has done in the first quarter.

Second, according to the Q1 presentation , "AIG Parent liquidity was $3.9B at March 31, 2023, compared to $3.7B on December 31, 2022."

Third, its balance sheet has shown positive equity each quarter for several years, and its income statement is showing a positive net income several years in a row.

Fourth, it fundamentally being an insurance company at its core it has seen YoY growth in net premiums written for two of its core businesses, global commercial lines & global personal insurance, which is a positive sign:

Positive sentiment on financial condition was also shared by CEO Peter Zaffino in his Q1 commentary. According to Zaffino:

We continued to execute on our capital management strategy, maintaining strong insurance subsidiary capital and parent liquidity. During the first quarter, we returned $844MM to shareholders through $603MM of AIG common stock repurchases and $241 million of AIG dividends.

In terms of financial strength, I would recommend this company, and the evidence shows that it is not in any cash trouble right now or anytime soon.

Also, keep in mind, unlike the bank runs we saw in March at a few specific banks that held a large amount of uninsured deposits, what is different with insurance companies is there is never really a "run" on insurance policies the same as with bank deposits. The major risk faced is having to suddenly pay out a bunch of costly insurance claims in a short time period and not having the liquidity to do so, however this risk is usually managed effectively.

Macro Effects on this Company are Positive

A key macro factor I would consider as being of relevance to AIG, as with other insurance companies, is the trend of rising interest rates since early 2022 driven by central bank rate decisions. This is because insurance companies like AIG hold a large portfolio of interest-bearing assets as another way to generate income besides just from insurance premiums.

With that said, I think the ongoing high rate environment, and potential for another rate increase this month by the Fed, according to recent sentiment by CME FedWatch , should continue to provide a tailwind to AIG's fixed income portfolio.

Consider that my viewpoint is supported by a June 2023 study done by data analytics & industry analysis firm FactSet:

Life insurance companies were well positioned to benefit from the Fed’s tightening monetary policy and rising interest rates over the last year. The reason is their investment total portfolios include a high percentage of fixed income securities, which are owned to generate steady, predictable levels of investment income to help pay policy claims. As lower-yielding securities in the fixed income portfolio mature, firms can reinvest the proceeds at higher interest rates and increase total investment income.

Let's see how that correlates with AIG's YoY investing income growth:

As the table shows, the company had an almost 10% YoY increase in total interest and dividend income.

Here is what CEO Zaffino had to say in his Q1 commentary :

Net investment income was $3.5B in the first quarter and $3.1B on an APTI basis. This reflects our active management of the portfolio over the last several quarters to improve the overall quality of investments and reduce volatility. We saw significant uplift from new money investments as well as higher resets on floating rate securities.

Looking forward to Q2 and Q3, I see no reason that this positive trend will continue in the next few quarterly results, especially since there is no immediate indication of rates coming down.

Therefore, I would recommend this stock on the basis of its business model benefiting from macro effects, in this case the macro environment of Fed interest rate hikes over the last year and continuing.

Rating Score

This stock I recommended in 4 of my 5 categories, so it is getting a buy rating. My rating is in line with the current Wall Street consensus as of July 12th, but less bullish than the consensus from SA analysis and the SA quant system, as shown below:

Risks to our Ratings Outlook

A key risk that has been identified lately, and affects this company too, is exposure to commercial real estate risk, specifically office properties.

In particular, as the chart below shows, office properties are 27% of the overall CRE loan book at AIG, a number I admit is higher than I would prefer since it puts over 1/4th of the commercial mortgage loan book into office properties.

This very valid concern among investors and analysts stems from reports like one in Forbes this April , which highlighted a $161MM default on office properties by Brookfield Corp ( BN ). The article mentions:

High office vacancy and interest rate hikes have contributed to a string of defaults this year and fueled concerns of a commercial real estate debt crisis.

However, as the saying goes, let's not throw the baby out with the bathwater just yet!

To deep dive further into AIG's portfolio exposure to offices, the company says, "European office and life science facilities, which make up 13% and 7% of the office loan portfolio, respectively, are performing well."

Also, keep in mind that CRE is one component of the larger asset portfolio at AIG. As the following pie chart shows from the company, a major part of their asset book is actually tied to corporate fixed income assets, it being the largest chunk of the portfolio, and not commercial real estate:

Hence, I don't think a company of this scale and with this large of an asset portfolio which is well diversified will necessarily face a major crisis due to office properties, although the risk exposure is certainly there and that is why I mention it, and it could cause many investors and analysts to be more bearish than I am on this stock.

Analysis Wrap up

To reiterate, today I am giving AIG a buy rating, in line with the Wall Street consensus. Its positives are competitive dividends vs peers, strong financial condition, an asset portfolio benefiting from the current interest rate environment, and reasonable valuation levels.

A headwind to rating it a strong buy today, in my opinion, is that it is starting to look overpriced in relation to its 200 day moving average, and though I don't think another March-like dip scenario will occur I am waiting on a dip nevertheless before being overly bullish on this one and going all in.

In closing, this is another one going on my financial industry watchlist in the insurance subsector, as it has matured well past its 2008 existential crisis and has re-emerged to be once again among the leading insurance names in the world. I continue to say the insurance sector is vital to our critical infrastructure as it gives other participants in the economy a way to "transfer" risk on to someone else, by doing so not having to bear the full cost & exposure to such risk.

I look forward to AIG's upcoming Q2 results soon, which I think will be along similar lines as Q1, with investing income continuing its upward trend.

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