Analyst Note| Brett Horn, CFA |
We think that because of the duration of AIG's underperformance, the market has been slow to react to the underlying improvement current management has effected and that shares are undervalued. On the P&C side, AIG has been a negative outlier, but we see no structural reason for AIG to generate such poor underwriting performance. We believe the company's historical issues have been driven by mismanagement, and we think the current management team has set the company on a path that should allow it to move results to a level in line with peers. Management has set a target for a combined ratio below 90% by the end of 2022, and this target looks very reasonable given recent performance (the underlying combined ratio was 91% in the most recent quarter) and further savings from the AIG 200 plan. We think the outlook for commercial P&C profitability is positive. The industry recently saw the largest pricing increases since 2003, and a more favorable industry backdrop should be a tailwind for the company's turnaround efforts. We believe a sum-of-the parts analysis is useful to backstop our $65 fair value estimate. The impending separation of the life insurance business also makes this approach more relevant. We think a reasonable application of peer multiples supports our view that shares of the no-moat company are undervalued.