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December 11, 2012 7:41 pm
Perhaps no US name is more synonymous with the financial crisis and its despised bailouts than AIG. Four years after AIG’s $180bn rescue, the US Treasury has agreed to sell the last of its stake in what Ben Bernanke once described as a hedge fund attached to a large and stable insurance company. The hedge fund has been wound down and, all told, the government says it will reap a profit of $23bn for its trouble. Its exit is an important milestone for AIG, but investors should already be focusing on the company’s core insurance business.
AIG’s shares have jumped more than 50 per cent this year as government involvement dwindled, recouping a decline of about the same amount in 2011. At $35, AIG’s shares still trade at about half the company’s book value while more profitable rivals in the insurance industry, such as Chubb, Travelers and ACE Limited, trade in line with or above book value. AIG’s return on equity, excluding one-time gains, is about 5 per cent, while some of its peers have ROES of 10 per cent, according to Bernstein Research. AIG is aiming for a 10 per cent ROE by the end of 2015.
Low rates will continue to put pressure on AIG’s life assurance business and those of its rivals. But even before its disastrous turn with derivatives, AIG was known for aggressive pricing on premiums in its property and casualty business, focusing on top-line growth rather than profitability.
In the first nine months of 2012, AIG had an underwriting loss of more than $800m in P&C. But excluding catastrophe losses and reserves its combined ratio – a metric for the baseline underwriting profitability – is running at about 100. That suggests premiums are just about covering claims and expenses over time. The key to boosting its AIG’s performance is improving the P&C underwriting, which the company is working towards. If it can succeed, AIG will be on its way to regaining investors’ long-term confidence.
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