AIG Maintains Growth Across All Lines To Beat Expectations

AIG’s (NYSE:AIG) earnings for the fourth quarter of 2013 beat market expectations as the insurance company reported EPS of $1.34, higher than the estimate of $0.96. ^[1] Operating income from insurance operations increased from $101 million in the fourth quarter of 2012 to $2.5 billion as the property and casualty unit reported operating income of $1 billion, up from a loss of $944 million. Lower catastrophe related losses helped the company as the combined ratio (expenses to premiums) improved from 125% to 104%.

AIG’s management also announced a $1 billion increase in its share repurchase program, leading to a total of $1.4 billion available for share repurchases, and 25% increase in quarterly dividend to $0.125 per share. We have a price estimate of $47 for AIG’s stock, in line with the current market price. We are in the process of updating our model for AIG to account for the latest earnings.

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AIG’s insurance operations include the international property and casualty unit, and the U.S. life and retirement unit. The former accounts for 43% of the company’s insurance operating income and the latter accounts for 55%, with the rest coming from mortgage guaranty operations.

Property And Casualty

For the fourth quarter, AIG reported a 6% increase in net written premiums. Premiums from the commercial line, which offers insurance contracts to companies, grew 7%. The company’s pricing strategy exceeded loss trends, allowing the loss ratio to improve from 100.9% to 77.9%. Global commercial premium rates increased 2.6% led by a 5% increase in the U.S. commercial property rates, which went up 3.7%, while casualty rates increased 6.5%. More than half of AIG’s P&C premiums come from the U.S.

AIG’s peers, The Hartford Financial Services Group (NYSE:HIG) and The Travelers Companies, Inc. (NYSE:TRV) have also maintained commercial rate increases of 8% for the last few quarters. Both of these companies operate in the same domain as AIG; AIG is the fourth largest insurer in the workers’ compensation line with a market share of 6.14%, behind Liberty Mutual Group (market share 8.7%), Travelers (market share 7.9%) and Hartford (market share 6.8%). It is also the largest insurance company in the “other liabilities” line of insurance, with a market share of 11.5%, ahead of Travelers. ^[2]  Given the market trends, we expect further increases in premiums in the coming quarters, although the rate might slow down.

The bottom line was also helped by a 17% increase in net investment income as the net yield improved from 3.77% to 4.59%. This increase was due to increased bond yields; more than 60% of AIG’s assets are invested in bonds, with around 28% in corporate debt and 18% in states, municipalities and political subdivisions. Three-quarters of the company’s investments in bonds are rated A or higher. We expect AIG’s yield to remain around the same level in the coming years.

Life And Retirement

AIG’s life and retirement unit reported a 29% increase in pre-tax operating income, as premiums and deposits climbed from $5.2 billion to $8 billion. Assets under management increased 10% from the prior year to $318 billion, with net inflows for $4.6 billion compared to net outflows of $1.3 billion in 2012. Variable annuity and retail mutual fund sales remained strong and drove the aforementioned increase in assets under management. Individual variable annuity sales were $2.3 billion for the quarter while fixed annuity sales were four times the figure reported last year. The retail unit, which caters to individuals, reported a 37% increase in operating income, driven by enhanced spread and higher fee income on separate accounts. The institutional unit, which offers group insurance contracts to companies, reported a 19% increase in operating income.

AIG has been looking to capitalize on MetLife’s (NYSE:MET) withdrawal from the variable annuity market and has overtaken the former leader into fifth position in the U.S. market. ^[3] Recently, AIG launched AIG Financial Network to push its annuity operations in the U.S. We expect continued growth from the company, but its designation as a bank systemically important financial institution (SIFI) by the Financial Stability Oversight Council (FSOC) might impose stricter capital requirements restricting prospects. We will closely monitor the situation and update our model accordingly.

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1. American International Group’s CEO Discusses Q4 2013 Results – Earnings Call Transcript [↩]
2. NAIC, Property and Casualty Insurance [↩]
3. U.S. Individual Annuity Sales, LIMRA [↩]