A Look At AIG’s Property And Casualty Business

Following its significant restructuring over the past several years, AIG (NYSE:AIG) now primarily provides life insurance in the U.S. and also has property and casualty operations in some of the biggest markets around the world. Its after-tax operating income has grown from $2 billion in 2011 to $6.8 billion in 2013, highlighting its operational recovery. We have a price estimate of $50 for AIG’s stock, in line with the current market price. With the company set to report earnings next week, we take a look at the company’s P&C operations, which account for 35% of its pre-tax earnings.

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Property And Casualty Operations

Around half of AIG’s revenue is generated from P&C insurance premiums, and half of these premiums are earned from the Americas. AIG is currently the fifth largest P&C insurer in the U.S., with a market share of 4.52%. ^[1] The company dominates the “other liabilities” line of insurance with a market share of 11.49%, ahead of The Travelers Companies, Inc. (NYSE:TRV), which has a market share of 5.63%. AIG is also the fourth largest insurer in the workers’ compensation line of insurance, with a market share of 6.14%. The company’s premium income from the Americas region has been around $17 billion for the last three years but we expect a gradual increase in the coming years as the U.S. economy and the job market improves.

Expansion In Asia

A third of AIG’s P&C premiums come from the Asia-Pacific region, where the company has operations in Japan, China, Korea, Singapore, Vietnam, Thailand, Australia and Indonesia. The acquisition of Fuji Fire & Marine Insurance Co. helped the company expand operations in Japan. While Japan is the main focal point of AIG’s operations in Asia, the company has also seen strong growth outside the country. Rate increases in property have complemented organic growth in specialty and financial lines, and as a result AIG’s P&C Premiums in Asia grew $7.6 billion in 2008 to $10.5 billion in 2012. However, currency fluctuations, particularly the weakening of the Japanese Yen against the U.S. dollar, led to a 10% decline in premium volume in 2013. We expect the company to regain momentum in the next two years.

EMEA

AIG also has established operations in the United Kingdom, Continental Europe, Russia, India, the Middle East and Africa. These operations account for 20% of the company’s P&C premiums and have been around $6.6 billion for the last four years. India, with a population of over 1 billion, presents a strong opportunity for expansion, but foreign direct investment (FDI) in the Indian insurance sector is currently limited to 26%. There have been talks of increasing the limit to 49%, but this might only be possible after the ongoing general elections in the country. ^[2]

In 2013, AIG Europe entered an agreement with HSBC Bank to distribute insurance products in Turkey, France and several other countries. The 10-year deal will primarily utilize the “bancassurance” or Bank Insurance Model (BIM), relying on retail banking networks for distribution activity, with sales made via insurance agents. We expect this deal to revive sales in the European market in the coming years.

Claims And Expenses

Due to the international nature of its operations, AIG is exposed to catastrophes worldwide. Claims and related expenses have fluctuated between 86% of premiums in 2010 and 67% of premiums in 2013. This metric is difficult to forecast, but we believe it will remain around the historical average of around 72% through the decade. You can modify the interactive chart below to gauge the effect a change in forecast would have on our price estimate.

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1. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2012 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM [↩]
2. Govt clarifies policy on FDI in insurance, The Hindu BusinessLine, February 5, 2014 [↩]