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Stock Strategist

Better Stewardship Creates Opportunity for AIG

The market’s view of the insurer’s turnaround efforts is too skeptical.

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 American International Group’s (AIG) problems during the financial crisis primarily related to its financial products division, and all of the issues that led to its blowup have been reduced to a point of immateriality, in our view. But the years since have shown that AIG would have destroyed substantial shareholder value even if it had never written a single credit default swap, that noncore businesses needed to be shed, and that the operational issues in the core operations need to be remedied.

Insurers have two potential sources of income: investment income and underwriting profits. Combined, these two streams determine the return on equity a company generates. The relative level of investment income for insurers depends on hard-to-predict capital market movements and is largely out of the company’s control; higher investment returns typically reflect higher risk taking as opposed to investing acumen, in our view. We do not believe any insurance company has a sustainable competitive advantage when it comes to investing float. (Warren Buffett and Berkshire Hathaway (BRK.B) would be the one exception to this rule.) As a result, we focus exclusively on underwriting profitability to distinguish quality companies in the sector.

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Brett Horn does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.