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Stock Strategist

There's Value in No-Moat AIG

Evaluating scenarios shows that even average performance could lead to substantial upside.


We do not believe that  American International Group (AIG) has an economic moat, but we do think the market is underestimating the firm's potential earnings power. New management brought in during the bailout has restructured the company, selling off noncore assets and reining in excessive risk-taking activities. While we don't expect the global multiline insurer to earn its cost of capital in the near term, we think the franchise value has improved, and if management executes on its strategy, shareholders could be rewarded over the long term.

Moats Are Hard to Come By in the Insurance Industry
For the most part, insurance is a commodity industry where sustainable excess returns are difficult to achieve. Competition is fierce, and participants can rapidly slash prices or undercut competitors in order to gain market share. Furthermore, insurance is an industry where most of the costs of goods sold (claims) is not known for potentially many years, which provides incentives for companies to sacrifice long-term profitability in order to boost near-term growth.

Jim Ryan does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.