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Hedge Funds Love American International Group Inc (AIG), But This Insurer Crushed It: The Allstate Corporation (ALL), Travelers Companies Inc (TRV)

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American International Group Inc (NYSE:AIG) has plenty of reasons to celebrate on Wall Street these days — from dethroning Apple as the hedge fund favorite, to big names like Bruce Berkowitz singing its praises. But even with the gaining support from the street, American International Group Inc (NYSE:AIG)’s performance during 2012 doesn’t come close to that of its competitors, namely The Allstate Corporation (NYSE:ALL). Let’s take a look at some of the biggest components to the insurers’ performance, whether the money managers got it wrong, and what it all means going forward.

American International Group Inc (NYSE:AIG)A quick look back
Over the past 12 months, American International Group Inc (NYSE:AIG)’s stock as appreciated by 30.6%, but this doesn’t come close to the majority of its rivals:

Insurer 2012 Gain
AIG 30.6%
Allstate 52.8%
Berkshire Hathaway 30.9%
Travelers Companies (NYSE:TRV) 42.6%

Source: Yahoo! Finance.

While stock performance is (of course) a very important aspect of an investment, it should not be the only factor used to determine the quality of an investment. If we look at some additional factors for American International Group Inc (NYSE:AIG) and The Allstate Corporation (NYSE:ALL), we’ll get a better sense of how the two insurers operate and if the stock changes are justified.

New business
The main revenue generator for any insurance company is its premiums. Without continued growth of its premium base, an insurer will have a harder time maintaining its market share, its investment capital, and its pooled capital to pay out claims. Over the past five years, American International Group Inc (NYSE:AIG) experienced a huge drop in premiums because of its bailout, but as confidence in the company returned, so did the new premiums.

Source: Companies’ annual financial reports and supplements.

During the same period, The Allstate Corporation (NYSE:ALL) had a slight decrease in new premiums, but it has regained some ground in the last two years. Despite the huge drop in 2009, American International Group Inc (NYSE:AIG) has really focused on boosting its premium underwriting and is now operating at the same level as it was in 2009 — with plenty of room to grow. American International Group Inc (NYSE:AIG) has also made up for some of its lost business by increasing its rates by 6%; The Allstate Corporation (NYSE:ALL) has also increased rates, but only by 3% in its largest operating segment — standard personal auto.

Investing for a living
The second driver of an insurer’s profitability is the income it makes by investing its pooled-premiums capital. The return a company makes on its investments is very important if it has had a decrease in new business, declining rates, and increased claims pay-outs. As we saw in a comparison between AIG and Berkshire Hathaway, even the great names in investing can lose some ground. AIG tied with Berkshire’s 4.7% return on investment for 2012, and beat The Allstate Corporation (NYSE:ALL)’s 4.1%.

Source: Companies’ annual financial reports and supplements

The Allstate Corporation (NYSE:ALL)’s five-year results are following the same downward trajectory as Berkshire, while AIG has had a steady increase in returns since 2009. The federal oversight of AIG’s operations may be a huge part of why the company is producing improved results while others are steadily declining — with the oversight came a huge overhaul of the company’s investment strategy.

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