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American International Group Inc (AIG), Hartford Financial Services Group Inc (HIG): This Insurer Has Improved Tremendously, But Is it a Buy Yet?

American International Group Inc (AIG)We all know insurance giant American International Group Inc (NYSE:AIG), or AIG, which is infamous for its extreme downward spiral during the financial crisis. Despite its reputation, the company has made great progress in turning itself around. American International Group Inc (NYSE:AIG) has fully repaid the $182.3 billion in government aid that it received, and most agencies regard their financial position as stable. With shares of the company still looking attractive after a 22% gain in the last four months, now seems like a good time to take a closer look at AIG, which is due to report its latest results on Thursday August 1.

AIG today

Although American International Group Inc (NYSE:AIG) is still an enormous company, they are somewhat smaller than they were pre-crisis. In order to pay back its government loans, AIG sold some of its assets, including 21st Century Insurance, American Life Insurance Co, and other parts of their businesses. The U.S. Treasury also was issued a considerable amount of common stock in AIG, which it sold the last of in December of 2012. At the end of the day, the government made a profit of $22.7 billion on its support of American International Group Inc (NYSE:AIG).

Currently, AIG has approximately 63,000 employees and serves customers in 130 countries all over the world. Products include property casualty insurance, life insurance, and mortgage insurance. One of the most positive outcomes of the crisis on AIG was that it forced the company to reduce its debt to a manageable level. As you can see in the chart below, the company’s long-term debt today is about one-fourth of its pre-crisis peak.

Looks cheap, but is it worth the risk?

While American International Group Inc (NYSE:AIG) certainly has a long way to go before it is completely out danger, the added risk that comes with owning the company’s shares is reflected in the form of reduced valuation. AIG is expected to earn $3.90 per share this year, meaning that it trades for 11.9 times current year earnings. The company is projected to grow its earnings to $4.17 and $5.02 in 2014 and 2015, respectively, which represents annual earnings growth of 13.7% on average.

So, AIG shareholders are compensated for the additional risk they take on by owning the stock. There is always the possibility that the company will need to raise additional cash while trying to further clean up its asset portfolio, which would dilute shareholders even further. While I don’t see that happening anytime soon, shares trade at about a 20% discount to their tangible book value to make up for the possibility. Before we go jumping in, let’s take a look at a couple of slightly less risky names in the sector to see what our investment dollars can get us.

Other ways to go

In terms of size and global reach, American International Group Inc (NYSE:AIG) is in a class by itself as far as U.S.-based insurance companies go, but two that have comparable product offerings and business models include Hartford Financial Services Group Inc (NYSE:HIG) and Loews Corporation (NYSE:L).

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