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

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 Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Top 10 Jobs for 2014 by Salary Gain (Predictions)

Top 5 Digital Trends for 2014

Top 6 Things You Can Do To Increase Your Productivity

Top 9 Trending Smartphones in 2013

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!