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A Second Vote for AIG
08/18/2006 12:00 am EST
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 ride—hit 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.”