American International Group Stock: Don’t Overthink It (NYSE:AIG)

Comparison to Chubb Reveals Underwriting Strength

After the deconsolidation of Corebridge Financial (CRBG), AIG’s (NYSE:AIG) business mix now closely resembles that of industry-leading peer, Chubb (CB). I like to compare AIG to Chubb to gauge their performance. Consider the following two graphics from recent company investor presentations.

AIG’s Business Overview

Chubb Business Overview

The following table provides a high-level comparison of the two:

Click to enlarge

AIG sold is Validus Re reinsurance and Crop Risk Services businesses so, unlike Chubb, it no longer has portfolio exposure in these areas. 70% of AIG’s portfolio is now Commercial P&C and Specialty lines, whereas Chubb’s is only 55%.

In my previous article on AIG, I covered the company’s underwriting improvements in 2022 and 2023 that had it closing in on Chubb. AIG continues to produce top-tier results that rival Chubb. AIG’s Global Commercial Lines Combined Ratio has averaged 86.8% over the last 4 quarters, and its Accident Year Combined Ratio has averaged 83% over the last 4 quarters. Chubb does not disclose a Combined Ratio specific to its Global Commercial P&C businesses, however, after analyzing its North America Commercial and General Overseas segments, I estimate it to be roughly 83.9%. Chubb does not disclose its Accident Year Combined Ratio. From this, we can see that AIG’s commercial underwriting performance has potentially been as strong as Chubb’s in recent quarters on an accident year adjusted basis.

Expense Reduction

The divestiture of Corebridge, Validus Re, Crop Risk Services, and Global Travel Insurance, has streamlined AIG’s underwriting focus. This shedding of non-core assets is also driving expense reductions as resources can be narrowed and focused. Roughly $300 million of admin expense is expected to come out of its corporate structure. This equates to a 1.3% expense reduction on a consolidated basis. AIG’s expense ratio (acquisition expense + general operating expenses) is on pace for about 31% in 2024. I see 28% achievable within the next 3 years. Chubb’s expense ratio has averaged 27% in recent years and is on pace for that level in 2024. AIG’s portfolio is a bit more global than Chubb’s but is now more focused. Given the success of AIG’s management at driving underwriting gains, to levels now approaching industry leadership, it stands to reason that a 27% to 28% expense ratio is also achievable. This gives AIG the potential for a 3%+ structural reduction in its combined ratio, which will drive permanently higher returns on equity.

Share Repurchases

AIG’s market cap is $46.6 billion. Based on the company’s announced plans, I’m projecting $7.3 billion of share repurchases over the current and next 5 quarters (July 1, 2024 through December 31, 2025). In a recent conference interview, CEO Peter Zaffino had the following to say about the company’s capital return strategy:

So not only increasing it [the dividend] north of 10% two consecutive years, but being a consistent dividend payer and increasing our dividend each year is our short to medium-term plan. And then the proceeds are coming from Corebridge are substantial. And, we’ve outlined a capital return strategy of $10 billion in ’24 and ’25 in the form of share repurchases. And I think that’s a lot of guidance, right? And so like when I think about ’26, I’m not suggesting we wouldn’t do share repurchases, but we want to drive earnings power. There’s opportunities to do M&A that’ll have to be compelling, it’ll have to be disciplined, it’ll have to be additive. But you talk to investment bankers in the insurance sector today, they’ve never been busier.

An additional $7.3 billion is 16% of the market cap, or roughly 1 out of every 6 shares that is going to be retired. It’s hard to believe that there is actually some short interest on the stock. An investor might be negative on the outlook of the company, but to short against this buying pressure is madness.

If, hypothetically speaking, the stock does not rise at all, I see it at 6 times earnings in 2026 due to the before mentioned expense reductions and the share count reductions. In reality, I expect underwriting strength and growth to continue to drive a long-term breakout in the shares.

Other Factors

My target price on AIG is $120 which I expect to see over the next 16 to 22 months. This is 12.5 times expected EPS of ~$9.62. Underwriting gains, expense reduction, capital returns, and higher investment income will help drive Return on Equity (‘ROE’) gains that also support this multiple. Comparatively, Chubb is currently trading for 13.5 times forward earnings.

Here we have the monthly log chart of AIG:

If I’m right, a strong move higher is coming soon, and you can see in this chart that the monthly channel is on target for $120 in my projected price target time frame. When my fundamental outlook does not match the monthly price channel, then I go back to the drawing board. That is not the case here. Here you can see the weekly chart is already buckling up against this lower channel, which I see holding, especially with the share repurchases.

The daily and weekly movements will start to turn bullish before the monthly.

Key Risk Consideration

The only thing that concerns me about AIG right now is that CEO Peter Zaffino just sold about 29% of his shares (Chubb CEO Greenberg also just trimmed his a bit). However, let’s keep in mind two things. First, Zaffino is the CEO of a company that specializes in risk management. I’ve listened to multiple interviews with him, and risk aversion is clearly in his persona. Second, given the political clown show at play which includes discussions of taxing unrealized gains, we should not be surprised to see CEOs taking chips off the table (this is happening all over the place, I might add). It is not that surprising to me that he has sold some shares, especially when there is a prominent market view that a recession is coming.

Strategic Conclusion

AIG’s streamlined portfolio focused on commercial P&C, consistent, top-tier underwriting results, expense reductions, and continuing substantial capital returns have it poised to drive ROE improvements that will bring it closer in line with Chubb’s 13%+ long-term average in a somewhat normalized interest rate environment. Don’t overthink it. This stock is a buy with 67% upside over the next 16 to 22 months. It is one of my largest holdings, and I love the fact that there continues to be lackluster sentiment on the stock.