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

-0.24%
Downside
78.17
Market
77.98
Trefis
AIG: American International Group logo
AIG
American International Group

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.

Check out our complete coverage of AIG here

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.

Relevant Articles
  1. Up 14% In The Last Twelve Months, What To Expect From American International Group Stock In Q4?
  2. Up 9% In The Last One Month, Where Is American International Group Stock Headed?
  3. American International Group Stock Is Undervalued
  4. American International Group’s Stock Is Trading Below Its Intrinsic Value
  5. American International Group Stock To Post Mixed Results In Q4
  6. Forecast Of The Day: AIG’s International Net Premiums Earned

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.

See More at TrefisView Interactive Institutional Research (Powered by Trefis)
Get Trefis Technology

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 []