Insurance Companies Rebound: Will Stocks Like AIG Reach Their Former Glory?

Chris Lau, Kapitall: AIG – hit hard by the financial crisis – recently closed out near a 52-week high. Is insurance on the rise?

Ever since AIG (AIG) bottomed out during the height of the financial crisis, the company has undergone extensive restructuring. And as late as 2011 AIG was fraught by scandals over toxic assets and executive pay. 

Now there is evidence that the stock might finally have started to recover - it recently closed at $52.30 - near a 52-week high. AIG continues to clean up its balance sheet by selling non-core assets. By focusing on its core competency, AIG is showing how companies can potentially rise from the darkest days of the recession to the cusp of profitability. 

Upcoming catalysts

AIG is trying to sell one of its divisions, the International Lease Finance Corporation (ILFC) to a Chinese investment fund, P3. If successful, P3 will take ownership of ILFC. This would remove the uncertainty around AIG instead selling it through an IPO. 

Whether ILFC is sold or spun off as a public company, both outcomes could further support a higher valuation for AIG. An investor need only look at the impact of Alibaba’s IPO on one of its parent companies Yahoo (YHOO) to support this case.

[Read more from Kapitall: Alibaba IPO Coming to New York, But Should You Buy?]

Other investing ideas

Sentiment is shifting towards the positive for many insurance and credit stocks. Springleaf Holdings (LEAF) closed yesterday at $20.20, which is far higher than its IPO pricing of $16. The company is a subprime lender to consumers with interest rates as high as 36%.

AIG (through AIG Capital Corporation) and Fortress Investment (FIG) have a joint venture with Springleaf. In 2010, AIG sold 80% of its holding in Fortress for $125 million – a stake now worth $1.68 billion. So maybe the real winner from the Springleaf IPO is Fortress?

Click on the interactive chart to view monthly returns over time. Data for LEAF not yet available.

Insurance firms seem to be performing well overall. Health insurance stocks in particular have profited off of Obamacare - as investors eye millions of new subscribers who will be brought into plans.

However, the insurance market as a whole has benefitted over the period as well, with many of the largest providers posting comparable returns. 

Click on the interactive charts to view yearly returns over time. 

Conclusion

The uptrend in AIG that began in late 2011 appears intact, but the stock is valued at only 10 times forward earnings per share. Investors will want to pay close attention to whether AIG or other insurance stocks can outperform competitors, or whether this is a temporary bubble in the company’s, and the industry's, tumultuous history.  

(Written by Chris Lau, a Kapitall contributor.   Returns sourced from Zacks Investment Research.)

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