American International Group (AIG, Financial), a U.S.-based multinational finance and insurance corporation, was a top detractor for the period. AIG’s share price declined during the quarter as a result of broader concerns stemming from the banking crisis. We have found that during times of financial stress, AIG tends to trade like a life insurer, even though we attribute only around 20% of its value to Corebridge. We do not agree with the market’s perceived assumption that life insurers’ risk profiles have increased meaningfully and will suffer asset impairments as they did during the global financial crisis. In our view, this panic is quite different from the global financial crisis. Most of today’s problems are the result of an asset and liability mismatch rather than a credit crisis. We believe that AIG’s core general insurance business drives most of the company’s value, and, in our view, underwriting has seen tremendous improvement since CEO Peter Zaffino joined the company. Since 2016, underwriting profits have improved by $7 billion, and $2 billion of that improvement occurred in 2022. The combined ratio in 2022 was in the low 90% range, and Zaffino believes that this can be below 90% in a few years. The company has accomplished this while lowering insurance limits by roughly half, which dramatically narrows the range of underwriting outcomes. In addition, AIG has been going through a major cost-savings plan for the last several years in preparation for the separation. Part of this plan is to simplify and collapse the reporting structure for the general insurance operations, and we believe the lower general operating costs will have a positive effect on the combined ratio. Ultimately, we believe the company remains an attractive investment given its discount to our perception of its intrinsic value.
From David Herro (Trades, Portfolio) and Bill Nygren (Trades, Portfolio)'s Oakmark Global Select Fund first-quarter 2023 commentary.
