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 and is written by Adam Jones.

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