Global Scope Helps AIG by Kelley Wright (06-OCT-05)
When Kelley Wright and his team last featured American International Group (NYSE: AIG ) in January, the company had just raised its dividend and finally made a long awaited return to Undervalue. Since their original feature the company was hit with an accounting scandal, a management shakeup, a devastating tsunami in Asia, and the aftermath of two of the largest hurricanes ever to hit the United States. Because of the global scope of its operations in more than 130 countries worldwide, AIG is uniquely positioned among Wright’s list of select blue chip insurance companies. Business segments include General Insurance, Life Insurance & Retirement Services, Financial Services, and Asset Management.
AIG’s General Insurance segment is the company’s largest segment by revenue. General Insurance is responsible for the provision and servicing of virtually all of the company’s property and casualty policies. Among the subsidiaries operated under this segment are the well-known Transatlantic Holdings, 21st Century, and United Guaranty Corporation. Notable recent expansion includes the 2003 acquisition of General Electric’s auto and home insurance businesses. During the same year General Guaranty began providing insurance to providers of student loans. By the close of the year this coverage had already reached a total of $22 billion.
Life Insurance & Retirement Services generated 62.4% of its operating income from foreign customers during 2004. The company’s extensive overseas operations are known primarily through its foreign subsidiaries: ALICO, AIA, Nan Shan, and AIG Edison Life. Japan is the largest area of foreign business, with additional strong presence in China, Singapore, Malaysia, Thailand, Korea, Taiwan, Australia, New Zealand, Vietnam, and India. Domestically, the segment’s presence is known mainly through the subsidiaries AGLA, AIG American General, AIG Annuity, USLIFE, VALIC, and SunAmerica Life. These domestic operations combined provided 37.6% of segment income during 2004.
AIG’s Financial Services segment provides a surprising variety of financial products and services. The company’s International Lease Finance Corporation (ILFC) acquires jet aircraft and provides them for lease to major airlines. Corollary income comes from fleet management services, which the company sells to outside operators. Within this segment, AIG also operates AGF which is a provider of real estate mortgages, consumer loans, retail sales finance, and credit-related insurance.
Asset Management activities are primarily conducted by AIG SunAmerica. SunAmerica may be best known to the public by its family of mutual funds. The company offers these funds through registered independent representatives. The company’s Global Investment Group manages assets for institutions, real estate investment funds, private equity customers, and other retail customers. Income for most services provided by this segment come in the form of management and service fees.
At a recent price of $62, shares of AIG are priced almost precisely at Undervalue. Though shares briefly plunged below Undervalue on emotional reaction, prices appear to have stabilized close to Undervalue since July. In a recent filing with the SEC the company disclosed approximately $40 million in pretax losses from hurricanes. AIG also had to post $1.5 billion in financing collateral earlier in the year, a result of its debt rating downgrades.
With a new management team in place and criminally guilty pleas from the former employees at the company, Wright’s team has hope that AIG has now put the worst of these scandalous matters behind it. Unprecedented disaster has led to broad emotional sell offs, driving shares to long-term low prices. Although these sell-offs are somewhat unpredictable, they also can provide rare buying opportunities just like the disasters that cause them. Particularly indicative of its strength is AIG’s fulfillment of virtually every statistical and fundamental benchmark used in Wright’s newsletter. Investors comfortable with short-term uncertainty should find shares of AIG an excellent purchase up to prices of approximately of $69.50/share, at which point it will enter a Rising Trend.
This article highlights the commentary of Kelley Wright for the Zacks.com audience. Kelley Wright provides insightful analysis, market commentary, and favorite recommendations on a timely basis in "Investment Quality Trends" newsletter. Try it free for 30 days and see if you can improve your investment performance. Learn more about "Investment Quality Trends" and 30-Day Free Trial. And get immediate access to current issues and special reports. Click here now.
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