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Outlining AIG's Path to Mediocrity

AIG needs only a modest improvement to be materially undervalued.

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In May 2017,  American International Group (AIG) announced that Brian Duperreault would replace Peter Hancock as CEO. We viewed this announcement positively, believing that Duperreault’s background would be a good fit in terms of solving AIG’s primary operational issue, which is improving commercial property-casualty insurance underwriting. However, the market remains unimpressed by his tenure, and the stock is down more than 10% since the company announced his appointment. We believe skepticism around his ability to turn the company around has grown, driving the weakness we are seeing in the shares. While AIG has not shown a lot of tangible progress in improving underwriting results so far, it will take some time to solve its issues, given the company’s size, the magnitude of its issues, and the inherent delay between implementing better underwriting practices and their appearance in reported results. We continue to believe that the market is underestimating the company’s prospects.

AIG does not need to see a dramatic improvement to stop destroying shareholder value; it only needs to move from being a negative outlier to merely subpar. Given that we see no structural issues in its core operations, we believe that the company gradually trending toward results more on par with its peers is a realistic assumption, now that it has a management team with a solid underwriting background. When we compare the current market valuation of AIG with that of its peer group, we see the stock is materially undervalued today even if the company manages to produce only adequate returns going forward.

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

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