American International Group Inc. (AIG), the insurance giant whose debt almost pulled the big banks into bankruptcy and received $182 billion in bailout aid during the financial crisis, is now a favorite on Wall Street and expected to outperform the market this year. After a miserable decade, shares of the New York City-based corporation have risen roughly 15.6% from their December lows through Thursday close, posting a 6.1% gain year-to-date (YTD) compared to the S&P 500’s 9.7% return. Now, some bulls on the Street are expecting AIG to see its share price rise by more than one-third, per Barron’s.
The New AIG
(10 Years After The Crisis)
- New business mix
- New management
- Large insurer with $500 billion in assets
- Troubled $200 billion-asset financial products business gone
- Main go to make underwriting profitable in 2019
'Absolutely Massive' Changes at AIG Since 2009
The optimism surrounding AIG has been fueled by a consensus that the firm’s business mix looks drastically different compared to a decade ago. In March 2009, the Fed’s restructuring of the insurance giant ended the crisis which almost caused a full-blown collapse the U.S. financial system.
RBC analyst Mark Dwelle indicates that the changes at IAG have been “absolutely massive,” highlighting several changes in management teams at the company over the past ten years. The financial-products division, the culprit for the insurance behemoth’s woes during the crisis, and which once held $200 billion in assets, is no longer a part of the company. Additionally, while AIG remains a large insurer with nearly $500 billion in assets, it sells more-benign property- and life-insurance products, noted Dwelle. He foresees an improvement in insurance margins to boost the stock by nearly 34% to reach a 12-month price target at $56.
Gordon Haskett analyst William Wilt echoed the bullish sentiment, pointing to AIG’s goal to return its underwriting operation to profitability in 2019. Wilt indicated that underwriting-margin improvement typically results in higher stock multiples for insurance companies - a bullish indicator for AIG.
Positive momentum aside, AIG's $37.7 billion market value remains minuscule compared to what it was a decade ago, and the stock is down about 98% from its all-time high. At current levels, shares would have to grow by 40-fold to regain their value.
While AIG is no longer a threat to the US or world economy, it still faces major challenges in boosting value. Earlier this year, the stock plummeted on Q4 results that revealed issues including a surprise buildup of reserves on its property and casualty book. Shares trade at a 17% discount relative to peers, illustrating just how cautious investors still are in buying shares of a company that wreaked havoc on the market in the not-so-distant past.