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AIG Valuations Expected to Improve on Performance in 2Q16

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Aug. 9 2016, Updated 8:04 a.m. ET

Stock falls

American International Group’s (AIG) stock has fallen more than 16% over the past year. The fall is mainly due to a weak operating performance, higher reserve developments, and declining returns on alternative investments.

AIG saw quarter-over-quarter improvement in operating income for 2Q16 on improved consumer insurance and a higher return on alternative investments.

Valuations

AIG reported a rise in operating profit in the second quarter of 2016, higher than analysts’ estimates. This was mainly due to improved investment income and consumer insurance.

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

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Brexit vote

In June 2016, Britain decided to exit the European Union, leading to panic in the European markets, especially in the UK market. The Brexit vote has led to a decline in valuations for European assets held by US firms. AIG’s stock is below its pre-Brexit level, but it has recovered substantially as buying continues in the US-based entities.

Valuations

AIG’s shares appear to be fairly valued, given the company’s size, restructuring initiatives, and relatively weak operating performance. There’s 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.

Since insurers are balance sheet–driven, they’re generally valued on the basis of their book values. AIG is trading at a one-year forward PBV (price-to-book value) multiple of 0.7x, compared to 1.2x for its peers.

With a current PBV multiple of around 0.8x, AIG is trading lower than other insurers, including Allstate (ALL), MetLife (MET), and Chubb (CB). AIG is trading at a one-year forward PE (price-to-earnings) ratio of 11.3x, compared to the industry’s PE ratio of 11.8x for the same period.

The company’s valuations have remained low due to a SIFI (systematically important financial institution) tag, which brings additional regulation costs.

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

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