Insurance giant AIG (NYSE:AIG) is scheduled to report earnings for the third fiscal quarter of 2012 on Thursday, 1st November. The company reported top-line growth in the last three quarters, and we expect the trend to continue. Net income grew 27% year-on-year in the second quarter as the company was able to repay the U.S. government’s loan and recover its brand reputation. Our $35 valuation of the AIG’s stock is in-line with the current market price.
Focus On Property And Casualty
Property and casualty is AIG’s biggest business, accounting for two-thirds of the company’s revenue. About 50% of its net premiums written are in the U.S. and Canada. In the third quarter of last year, the company was hit hard by natural disasters like Hurricane Irene and Tropical Storm Lee, leading to catastrophe related losses of $574 million, of which $372 million were due to Hurricane Irene.
Prior to Hurricane Sandy, Mother Nature had been kind this year with no major natural disasters reported in the U.S. Fellow P&C insurer The Travelers Companies (NYSE:TRV) reported earnings earlier in October with a significant improvement in loss and loss adjustment expense ratio as catastrophe related losses dropped 85%. We expect a similar improvement in AIG’s margin for the third quarter.
AIG has also recovered its brand image in the eyes of the general public and is once again ready to use the AIG brand in place of Chartis to promote its P&C business. Chartis was the name given to AIU Holdings LLC to dissociate it from the parent company following the 2008 disaster.
International expansion is crucial for AIG’s business, and we believe it is taking the right steps by investing in developing markets, particularly in Asia. About 10% of the company’s net written premiums in the last quarter were in high growth economies.
Despite the sale of its subsidiaries such as AIG Star Life Insurance and AIG Edison Life Insurance Company, which were sold to Prudential Financial (NYSE:PRU) in 2010, and American Life Insurance Company (ALICO) which was sold to MetLife (NYSE:MET), AIG looks set to maintain international growth.
Retirement solutions account for 11% of AIG’s revenues. The company increased its focus on variable annuities which remain quite popular among American buyers. Variable annuity sales increased by over 20% year-on-year in the first half of the year. With MetLife, the leading variable annuity seller in 2011, cutting back on sales, AIG was able to gain market share in the first six months from 4.5% to 5.7%.
The company acquired broker-dealer Woodbury Financial from Hartford Financial Services Group, allowing it to expand its distribution network in the U.S. We believe that AIG stands to gain market share in the U.S. retirement solutions market in the near term.