American International Group Inc (AIG) & Hartford Financial Services Group Inc (HIG) Book Value Metrics – Which To Use?

Hartford logoI’ve been looking into ways to get exposure to the insurance industry, and have narrowed the search to two companies: American International Group Inc (NYSE:AIG) and Hartford Financial Services Group Inc (NYSE:HIG). Both appear to be compelling investments at first glance.

American International Group Inc (NYSE:AIG) provides a range of insurance and financial services.  The company received a huge bailout during the financial crisis and is now a hedge fund darling that is either loved or hated by the investor community.  The stock sports a great PEG ratio of 0.95 and has a mountain of cash on it’s balance sheet. The Hartford Financial Services Group Inc (NYSE:HIG) is a much smaller company that also provides various insurance and financial service products.  The stock has flown under the radar, but is up over 14% this year.  The stock also sports a PEG ratio of 1.2.  Both companies are also buying back debt to shore up their balance sheets.

While researching these companies, I was struck by an interesting metric that both companies report.  Both American International Group Inc (NYSE:AIG) and The Hartford Financial Services Group Inc (NYSE:HIG) report both a “Book Value Including AOCI” and a “Book Value Excluding AOCI.” After some research, I learned that AOCI stands for Accumulated Other Comprehensive Income. Essentially, this metric includes unrealized gains and losses from non-core activities such as cash flow hedges and actuarial gains and losses.

Each company addresses which of the two metrics they suggest be used in their 10-K:

“We believe Book Value Per Share Excluding AOCI is useful to investors because it eliminates the effect of non-cash items that can fluctuate significantly from period to period, including changes in fair value of our available for sale portfolio and foreign currency translation adjustments.” – American International Group Inc (NYSE:AIG) Q4 2012 Form 10-K

“The Hartford Financial Services Group Inc (NYSE:HIG) believes book value per diluted common share excluding AOCI is useful to investors because it eliminates the effect of items that can fluctuate significantly from period to period, primarily based on changes in market value.” – The Hartford Q4 2012 Form 10-K

But after additional digging, I found an academic study that was done by Dr. Doron Nissim at Columbia Business School in 2011.  His study concluded that excluding AOCI from insurance company valuations worsened the valuation accuracy. It is typical for insurance company analysts to use the book value ex. AOCI because, as both companies mention above, the AOCI metric can be volatile, and excluding this value helps stabilize the valuation metrics.

The tables below present the book values for American International Group Inc (NYSE:AIG) and Hartford Financial Services Group Inc (NYSE:HIG), including and excluding AOCI for year-end 2011 and 2012.

Book Values (excluding AOCI)
Company December 31, 2012 December 31, 2011 Percentage Change
AIG $57.87 $50.11 15%
Hartford $40.79 $41.73 -2%
Book Values (including AOCI)
Company December 31, 2012 December 31, 2011 Percentage Change
AIG $66.38 $ 53.53 24%
Hartford $46.59 $44.31 5%

Those who are bullish on these companies should like the idea of book value including AOCI being more accurate because it has grown faster than the company’s book value excluding AOCI.

Keep this study in mind when looking at valuations of insurance comparisons in the future.

The article AIG & Hartford Book Value Metrics – Which To Use? originally appeared on Fool.com and is written by Adam Jones.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Best States To Practice Medicine

The 10 Best States to Have a Business

The 12 Most Expensive Apple (AAPL) Apps in the Market

The 10 Richest Billionaires in the World

10 Biggest Kickstarter Failures

The 10 Best Places to Work At

The Top 10 of Google Inc (GOOGL)’s Most Expensive Acquisitions

13 Best Cities to Visit in South America

10 Most Expensive Works of Art of All Time

The 10 Richest Banks in the World

The 10 Best-Paying Jobs in America (2014)

7 Most Expensive Foods in the World

The World’s Top 10 Earning Authors

Five Wicked and Very Expensive Items (and Other “Stuff”) Sold on eBay

10 Biggest Celebrity Bankruptcies

The Top 10 Highest Paid CEOs in 2014

The 10 Most Expensive Real Estate Cities in America

10 Most Expensive States To Live In America

The 10 Best Airlines in the World

The 10 Best-Selling Cars in 2014

The 10 Best Industries to Invest In

The 10 Most Expensive States to Own a Car In

Top 10 Business Schools in US: 2014 Rankings

Top 20 Female Billionaires in 2014

6 Movies That You Should Watch to Better Understand The Cold War

Top 15 Best Paying Jobs for Women in 2014

Top 6 Things Rich People Do Differently Every Day

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top 6 Tax Scams and How to Protect Yourself

Top Businesses to Invest In

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!