AIG: Prepared for the Storm

Hurricane season is in full swing. Last year, hurricanes, led by Katrina, Rita and Wilma, caused a record loss of $57.3 billion for property and casualty insurers. American International Group, the world's largest insurer, suffered some of the biggest losses from these storms. But the prospect of another devastating hurricane season shouldn't deter investors from considering shares of the New York City-based financial-services powerhouse.

AIG has sought to insulate itself from the worst ravages of hurricanes this year. How? It has raised prices for property and casualty insurance, shifted risk to other insurers and limited coverage. Price hikes have not hurt demand. Net premiums from property and casualty insurance have climbed 9% over the past 12 months. Property and casualty insurers have the power to increase the price of their policies because more companies fear the risk of hurricane damage, says Jeff Auxier, portfolio manager of the Auxier Focus fund, which holds AIG shares.

Merrill Lynch analyst Jay Cohen expects AIG to generate strong earnings from its property and casualty business through 2007. Some of that catastrophic windfall will offset troubles elsewhere in the company. AIG has struggled to keep profits growing in its life-insurance business in Japan and Taiwan.

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Still, the far-flung empire of AIG is more of a strength than a weakness, particularly in China. Most rivals have to form joint ventures and split profits with local firms to compete in China. AIG has a wholly owned Chinese insurance subsidiary, which means that the company can reap more profits from this fast-growing market than its rivals can.

Despite its already vast reach, AIG has expanded into new areas of business. The company will begin writing mortgage insurance in Canada this year. And it recently acquired a Taiwanese business insurer and a Chinese life insurer.

Investigations into AIG's accounting practices have beaten down the stock, which, at $64.13, is 38% below its 2000 high. But the company has put much of those problems behind it. It incurred a $1.15 billion charge to settle numerous regulatory complaints from New York Attorney General Eliot Spitzer and the Securities and Exchange Commission, and long-time CEO Maurice Greenberg resigned.

AIG shares look cheap. The stock (symbol AIG) trades for 11 times the $5.67 a share that analysts expect the company to earn this year and just ten times 2007 forecasts of $6.18 a share, according to Thomson First Call. By contrast, the average property-and-casualty-insurance stock sells at 12 times 2006 profit estimates. Given that AIG is a leader in several insurance businesses and has better access to emerging markets than it rivals, the discount may not be warranted. Cohen thinks share are worth $75.