AIG (NYSE:AIG) is expected to announce earnings for the first quarter of 2013 on Thursday, May 2. The insurance company’s stock has been rising steadily since the Treasury Department completed the sale of its stake in AIG for a profit of $22.7 billion. The decision to disassociate itself from former CEO Maurice Greenberg’s class-action lawsuit against the U.S. Government has also helped the company’s public image.  The stock price has risen nearly 20% since the turn of the year.
After completing the forced divestiture of assets like foreign life insurance units American International Assurance and American Life Insurance Company (ALICO), which was sold to MetLife (NYSE:MET) for approximately $16.2 billion, AIG came out with a renewed focus on international property and casualty operations in 2012. The company reported 10% revenue growth over the last year and we expect it to maintain the momentum this year as well.
Our $39 valuation of the AIG’s stock is in-line with the current market price.
P&C Leads The Way
Around 87% of AIG’s premium income comes from P&C operations. It earns more than half of its $35 billion P&C premiums from the U.S. It is the fifth biggest insurer in the country in terms of direct premiums earned with a market share of 4.52%.  It is the largest insurer in the other liabilities line of insurance ahead of The Travelers Companies, Inc. (NYSE:TRV) with a market share of 11.5%. This line of insurance accounts for more than 10% of direct premiums earned by P&C insurers across the U.S. AIG is also the fourth largest insurance company in the workers’ compensation line of insurance.  This line of insurance also accounts for 10% of the P&C market in the U.S.
Following the sale of the Treasury’s stake in the company, AIG was able to rebrand its P&C operations from Chartis to AIG Property Casualty in the third quarter of 2012 in order to re-associate it with the parent company. The company already has a strong distribution network of banks and broker dealers and will have to maintain its brand to survive in a highly competitive insurance market in the U.S. There are approximately 2,462 total P&C companies in the U.S. with which AIG competes. We expect AIG to gain market share in the U.S. P&C market in the coming years as it regains its brand image.
AIG also has P&C operations in high growth Asian markets like Japan, China, Korea, Singapore, Vietnam, Thailand, Australia and Indonesia. These markets account for 30% of net premiums earned by AIG’s P&C division. AIG is the largest foreign property casualty insurer in Japan, which is the second biggest insurance market outside the U.S.  The country has the highest investable asset pool of currency and deposits in the world, at $10.9 trillion, about 50% higher than the U.S. While the life insurance penetration (premiums as a percentage of GPD) is greater than 8%, the property and casualty market is lagging behind with penetration of just 2%.  We expect a steady increase in its market share in the next few years.Notes:
- American International Group, Inc. : As public fumes, AIG says will not sue U.S. over bailout, 4-Traders, 9th January, 2013 [↩]
- NAIC, Property and Casualty Insurance [↩]
- Ref1 [↩]
- Swiss Re’s World Insurance [↩]
- http://www.seiho.or.jp/english/publication/2011/pdf/2-11.pdf)) This provides immense potential for future expansion. We expect high growth in premiums from Asia in the coming years.
U.S. Life Operations
Apart from its P&C business, AIG also provides life insurance and retirement solutions in the U.S. Premiums and fees from this division account for only 8% of the company’s revenues but positive investment results mean that it is a high margin business. Nearly 41% of AIG’s net income comes from its life and retirement business. AIG is currently the 11th largest life insurer in the U.S. in terms of direct premiums with a market share close to 2%. ((NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS LIFE AND FRATERNAL INSURANCE INDUSTRY 2012 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM [↩]