AIG Earnings Climb Due To Fewer Disasters This Year

AIG (NYSE:AIG) saw profits surge in the first quarter of 2012, as the reported net income doubled from $1.30 billion reported last year to $3.21 billion. ^[1] A significant decrease in the number of natural catastrophe claims is one of the primary reasons attributed to this increase in earnings as the company had suffered huge catastrophe related losses last year. AIG’s main competitors include MetLife (NYSE:MET), Hartford Financial (NYSE:HIG), Prudential Financial (NYSE:PRU) and Manulife Financial (NYSE:MFC).

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Relief from Natural Calamities

A decline in natural disasters across the world allowed for some needed relief for insurance companies like AIG. Chartis, the property and casualty division of AIG, reported an operating income of $1.0 billion as it underwent restructuring to improve risk selection. The company incurred significant losses last year due to a high number of natural catastrophes like the earthquake in Japan last year. Property and Casualty is the main area of operation for AIG and accounts for more than half (52%) of our price estimate for AIG’s stock. We expect this division to continue its strong performance through the Trefis forecast period as the company focuses on reducing risks, delivering higher value products and penetration in emerging economies.

U.S. Life Insurance

AIG’s life insurance division in the U.S., SunAmerica performed admirably through the first three months of the year as it reported an operating income of $1.3 billion. An effective distribution network and increase in wholesaler productivity led to record variable annuity sales which increased by 38% over the last quarter. Fixed annuity sales however, declined due to the low interest rate environment but are expected to pick up momentum. The company launched a new product, the Volatility Control Fund, which offers benefits at reduced risks and is expected to boost sales for SunAmerica.

AIG bought back $3 billion of its shares from the U.S. Department of Treasury, as it raised $6 billion by divesting its stake in AIA, a life insurance company based in Hong Kong.

We have a price estimate of $19.72 on AIG’s stock, about 40% below its current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. American International Group’s CEO Discusses Q1 2012 Results – Earnings Call Transcript, Seeking Alpha, 4^th May, 2012 [↩]