AIG (NYSE:AIG) is scheduled to announce earnings for the second quarter of 2013 on Thursday, October 31.  The insurance giant will be looking to continue its turnaround from the 2008 crisis after having reported positive operating income for each of the last seven quarters. The company reported a 17% year-on-year increase in net income, with a 21% increase in insurance operating income for the second quarter of 2013, and also introduced a $0.10 per share dividend along with a $1 billion share repurchase program as it came out of the Fed’s shadows.
Looking at the operations, AIG’s insurance income is evenly split between its U.S. Life and Retirement operations and its International Property and Casualty (P&C) operations. The P&C division reported an 18% jump in operating income for the second quarter, helped by strong investment results and a 4% increase in net premiums, while the Life and Retirement division reported a 23% increase in operating income and a 24% increase in premiums, driven by strong variable annuity and mutual funds sales. We expect another quarter of strong results from the insurance company.
P&C Looks Up In The U.S.
Although it has P&C operations worldwide, half of AIG’s P&C premiums come from the U.S. The company is the fifth biggest P&C insurance company in the country with a market share of 4.52%.  It is particularly strong in the “other liabilities” line of insurance with a market share of 11.5%, ahead of The Travelers Companies, Inc. (NYSE:TRV). AIG is also the fourth largest insurer in the workers’ compensation line with a market share of 6.14% (Travelers is the second largest insurer in the workers’ compensation line). Both these lines account for 10% each of the P&C premiums in the country and are expected to grow in the coming years.
Travelers recently reported a record quarterly operating income of $883 million for the third quarter of 2013, with a 7% year-on-year increase in premiums from the workers’ compensation line. While the company’s pricing strategy – with a 10% renewal premium change – was a factor in this growth, we believe that the improving job market will also lead to higher demand for commercial P&C insurance. The unemployment rate in the U.S. recently dropped to a four-year low of 7.2% in September.  As Travelers and AIG operate in the same market, focusing on workers’ compensation and other liabilities insurance, we expect the latter to replicate the strong results reported by the former for the third quarter.
AIG reported a 4% increase in net premiums for the second quarter, helped by a 3.6% increase in commercial premiums and a 4.7% increase in consumer premiums. The commercial subdivision accounts for 85% of AIG’s P&C operating income.
Potential in Asia
Around 30% of AIG’s P&C premiums come from Asia, where the company has established operations in markets like Japan, China, Korea, Singapore, Vietnam, Thailand, Australia and Indonesia. AIG is the largest foreign property casualty insurer in Japan, which is the second biggest insurance market outside the U.S.  P&C penetration (premiums as a percentage of GDP) is just 2% in the country compared to the life insurance penetration of 8%.  China is one of the biggest markets in the world, with a population of over 1 billion, a GDP annual growth rate of around 8%, and P&C penetration of less than 2%.
We will keep a close eye on AIG’s Asian results to see if it can fully capitalize on the potential in the Asian markets.
Life And Retirement In The U.S.
AIG is currently the eleventh largest life insurer in the U.S. in terms of direct premiums, with a market share close to 2%,  but is looking to expand its annuity business, particularly after MetLife’s (NYSE:MET) decision to exit the variable annuity market. AIG is now the sixth biggest insurer in the variable annuities market, with a share of 7%.  Variable annuities remain a popular retirement solution product in the U.S. and account for 70% of the annuities market.
AIG reported a 65% surge in retirement solutions premiums last quarter, with a 10% increase in assets under management, helped by a strong performance by the stable value wrap product. In contrast, MetLife, which pioneered the variable annuity market and was the market leader in 2011, reported a 40% decrease in variable annuity sales through the three months ending June. We expect AIG to further expand its variable annuity business this quarter.Notes:
- AIG to Report Third Quarter 2013 Results on October 31, 2013 [↩]
- NAIC, Property and Casualty Insurance [↩]
- U.S. Department of Labor, Labor Force Statistics from the Current Population Survey [↩]
- Swiss Re’s World Insurance [↩]
- http://www.seiho.or.jp/english/publication/2011/pdf/2-11.pdf)) The market is expected to grow in the coming years, with AIG in a prime position to capitalize.
AIG is also the largest foreign property and casualty insurer in China, but regulations have limited the market share that foreign insurers have to around 12%. ((Foreign Insurance Companies In China, PWC, December 2012 [↩]
- NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS LIFE AND FRATERNAL INSURANCE INDUSTRY 2012 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM [↩]
- 2013, LL Global, Inc. SM U.S. Individual Annuity Sales 1st Quarter 2013 [↩]