It is almost two years since Brian Duperreault took the helm at AIG, becoming the firm’s sixth CEO since 2008.
But despite all the noise, the constant attention, the frenetic corporate activity (first as a seller and now as a buyer), the billions of dollars spent on new talent, new systems, new consultants and new “anything to change the conversation”, the company has outwardly made remarkably little progress in the decade since its brush with bankruptcy.
The firm’s stock has fallen by 19.6 percent since the end of Q3, versus a 7.1 percent drop for the S&P 500. Since new management took over, the stock’s total return of negative 27.7 percent represents 44.3 percent underperformance against the broader market.
AIG’s market price represents less than 65 percent of stated book value, and at the bottom of the recent market correction in December last year reached its lowest level since March 2013 – a remarkable fact given the level of equity market recovery over that period. And, perhaps most damningly, the spread between AIG’s valuation and the P&C industry average has been trading at its widest levels for the past decade.
After an initial honeymoon period, Duperreault is facing the first real test of his tenure – and one that is remarkably similar to those faced by many of his predecessors.
The company is set to report earnings after market close on 13 February next week, with a conference call scheduled for the following morning.
Part of Duperreault’s strategy has been to reinsert some swagger into this once-dominant business. AIG urgently needs to re-establish its turnaround narrative and win over investors, starting next week.
There are essentially two key questions the firm has to address.
First, when will the company start to show improvement in its P&C underwriting results?
As I have written previously, despite the apparent lack of progress, AIG has been making radical changes behind the scenes.
Many of these steps have yet to take hold. The nature of an insurance turnaround takes time, and the lagging impact of insurance accounting means the financial impact reported to investors is even more deferred.
The firm will probably get a pass on the fourth quarter given the industry-wide noise, and management has little incentive to pull forward any good news into earnings, particularly with a new CFO.
But the firm still needs to give the market better visibility on the progress it is making, and communicate its confidence in the pace and timing of its expected eventual improvement from its operational changes.
Second, and perhaps more importantly, will the firm reconsider its strategy on capital allocation and growth?
New management has enjoyed something of a free ride to date on its liberal, growth-based acquisitions policy.
But with the valuation languishing, there are few things you can do for the same return or for lower risk than buying back your own stock at a fraction of your net assets.
To put this in context, the cash spent on acquisitions in 2018 alone probably represents around 15-20 percent of the current market capitalisation.
If you broadly believe in the carrying values of your assets and liabilities, it is hard to make a case against buying back as much stock as you can at these levels, so long as your goal is creating value for shareholders rather than building a great company or an empire for management.
Otherwise there is one inescapable question: if you do not think your stock is undervalued, especially relative to the expensive premiums paid for inorganic growth, why should external investors?