AIG Earnings Preview: P&C Profitability Holds The Key to Results

by Trefis Team
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AIG (NYSE:AIG) is scheduled to report earnings for the first quarter of 2014 after market close on Monday, May 5. [1] Strong property and casualty results helped the company beat market expectations for the December 2013 quarter as the division swung from a loss of $944 million in the prior year to an operating profit of $1 billion. Lower catastrophe related losses helped the company as the combined ratio (expenses to premiums) improved from 125% to 104%. As a result, the operating income from insurance operations increased from $101 million in the fourth quarter of 2012 to $2.5 billion. We expect another quarter of strong results from the company as it maintains its focus on P&C profitability. Our $50 price estimate for AIG’s stock is in line with the current market price.

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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 remaining 2% coming from mortgage guaranty operations.

Property and Casualty

More than half of AIG’s property and casualty premiums come from the U.S., where AIG is the fifth largest insurer, with a market share of 4.52%. [2] The company is particularly strong in the “other liabilities” line of insurance with a market share of 11.49%. It is also the fourth largest insurer in the workers’ compensation line of insurance, with a market share of 6.14%.

For the fourth quarter of 2013, AIG reported a 6% increase in net written premiums. Premiums from the commercial line, which offers insurance contracts to companies, grew 7%. Commercial property rates in the U.S. went up 3.7% while casualty rates increased 6.5%. Global commercial premium rates increased 2.6%.

AIG, like its peers The Hartford Financial Services Group (NYSE:HIG) and The Travelers Companies (NYSE:TRV), has been maintaining high pricing rates to offset low returns from investments. 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. The Fed’s monetary policies have been affecting yields from these investments due to the low interest rate environment. However, long-term interest rates started increasing last year as the Fed announced its intention to taper the QE3 program. As a result, AIG reported a 17% increase in net investment income as the net yield improved from 3.77% to 4.59%. 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 for the December quarter, helped by a 54% surge in premiums and deposits and a 10% increase in assets under management. The company reported net inflows of $4.6 billion compared to net outflows of $1.3 billion in 2012. This was driven by strong variable annuity and retail mutual fund sales.

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] Last quarter, the company 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.

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Notes:
  1. AIG to Report First Quarter 2014 Results on May 5, 2014, Investor Relations []
  2. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2012 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM []
  3. U.S. Individual Annuity Sales, LIMRA []
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