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A Second Vote for AIG

08/18/2006 12:00 am EST


Kelley Wright

Managing Editor, Investment Quality Trends

Kelley Wright offers additional details regarding giant insurer American International Group. Also noting the company’s share declined as a result of several natural disasters, he makes a solid case for picking up the shares at these undervalued levels…


American International Group’s (AIG NYSE) share has been on a rough ridehit by management scandals, two of the largest hurricanes ever to hit the US, and the devastating tsunami in Asia. Because of the global scope of its operations in more than 130 countries, AIG is uniquely positioned among our list of select blue chip insurance companies.


“AIG’s General Insurance is the company’s largest segment by revenue, providing and servicing virtually all of its property and casualty policies. Subsidiaries include Transatlantic Holdings, 21st Century, and United Guaranty Corporation. In 2003, AIG acquired General Electric’s auto and home insurance businesses and began offering insurance to providers of student loans. By the close of 2005, this coverage had already reached a total of $22 billion.


“More than half of the life insurance & retirement services segment’s operating income is generated from foreign customers, with Japan being the largest. Additional strong business comes from China, Singapore, Malaysia, Thailand, Korea, Taiwan, Australia, New Zealand, Vietnam, and India. Domestically, the segment’s presence is primarily through AGLA, AIG American General, AIG Annuity, USLIFE, VALIC, and SunAmerica Life subsidiaries.


“AIG’s financial services segment provides a surprising variety of products and services. International Lease Finance Corporation (ILFC) acquires jet aircraft and leases them to major airlines. Fleet management services are sold to outside operators. AIG also operates AGF, a provider of real estate mortgages, consumer loans, retail sales finance, and credit-related insurance.


“Asset management activities are primarily conducted by AIG SunAmerica, best known by its family of mutual funds. The company’s Global Investment Group manages assets for institutions, real estate investment funds, private equity customers, and other retail customers. Income primarily comes from management and service fees.


“A new dividend increase has brought new signs of financial strength from AIG, as well as lowered downside risk. At a recent price of $61, the company is undervalued with a yield of 1.1%, while typically only offering 0.8% at undervalue. From current levels, there is an upside potential of 261% to an overvalue price of $220, low yield of 0.3%. Though AIG has high levels of debt, this is not uncommon for insurance companies. We note an A+ S&P quality ranking as well as an excellent record of dividend growth. AIG also maintains a low payout ratio, which helps to insure the dividend will be protected in case of business downturn. At current levels, shares offer almost unprecedented historical value, coupled with a very large upside potential, making AIG an attractive option for purchase.”

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