The company underwent structural changes after suffering huge losses on credit default swaps and has re-emerged as one of the biggest players in the market. An improved outlook from
rating agencies and a
strong performance in the first quarter of 2012 have contributed to the stock's climb to its highest price since the onset of the global recession.
We believe that AIG has taken the necessary steps to remedy its business and, as such, have revised our
price estimate for the company's stock to $30, which is about 10% ahead of the current market price. We expect a strong performance from the company this year as it continues to repurchase shares from the U.S. Treasury.
Check out our complete coverage of AIG here.
Here are a few key factors which influenced our valuation of the company.
Opportunities in Emerging Markets
AIG has established a strong base of operations in developing economies in Asia and Latin America. With plans for aggressive expansion in countries such as China, India, Chile and Uganda coinciding with a period of economic development, Chartis, AIG's global property and casualty (P/C) division, is poised for sustained international growth. Chartis suffered significant losses last year due to a high number of natural disasters such as the earthquake in Japan, but improved risk selection and a fall in natural disasters saw the division report net income of $1 billion for the first quarter of this year. We expect an increase in AIG's P&C market share as the company continues to penetrate into emerging markets.
Increased Annuity Sales
A heightened emphasis on long-term financial planning has been observed among the youth in the U.S., with employees in their twenties opting for retirement products to guarantee income after
retirement. This trend, coupled with population growth and the baby boomer generation approaching retirement age, should drive annuity sales in the U.S. over the next few years. We expect AIG to capitalize on its reputation as a leading solutions provider to attract customers looking to secure their financial futures.
Investment in Subprime Securities
As property values across the U.S. fall and mortgage delinquency rates dip below pre-2008 crisis levels, increased investment by AIG in non-government-guaranteed residential and commercial-mortgage backed securities holdings seems to be a
The company has increased its holdings in the aforementioned securities by over $17 billion since 2010. Despite being a risky proposition, these securities offer high returns as the debt crisis in Europe has put a damper on investment yields in the region. Although it was investments in subprime securities that led to a liquidity crisis for the company in 2008, we believe the company is more aware of the risks involved and will be more prudent this time around. The investment of insurance premiums accounts for 33% of our price estimate for AIG.
Speculation Over Greece
Global capital markets are eagerly awaiting the results of the referendum concerning Greece's potential exit from the eurozone. The decision will have a huge impact on financial institutions in the region as the sovereign debt crisis continues to intensify.
AIG has taken several measures to contain the effects of an exit, should it occur. These measures include the allocation of staff from Argentina, which has experience in dealing with a financial crisis. The Argentina team was successful throughout the currency crisis in the country and should help AIG sustain its performance in Europe. We will keep a close eye on the developments in Greece and the rest of Europe in the next few months.
Exit From Aircraft Leasing
Additionally, AIG is divesting its plane-leasing operations by selling its stake in ILFC Holdings. Although the business has been profitable, with more than 1,000 owned or managed aircraft, the company has decided that it is not a part of its core operations and plans to dispose of nearly 80% of its holdings in the next three years. AIG is looking to sell non-essential assets as it seeks to repurchase shares from the government. We expect aircraft leasing revenue to fall in the coming year as the company says adieu to the business.
Overall, we believe that AIG's management has done a good job in turning around the struggling parts of the business and focusing on its core competencies. Better risk management processes and smarter investment decision-making should allow the company to perform strongly going forward.
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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.