AIG Q2 Earnings Preview: Growing Economy, Currency Fluctuations Will Impact Performance

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AIG (NYSE:AIG) is slated to report earnings for the second quarter of 2014 Monday, August 4. [1] In the previous quarter, AIG’s earnings were impacted by currency fluctuations and high catastrophe-related losses, leading to a 10% year-over-year drop in after-tax operating income. [2] Improvements in the economic environment should bring some growth for the company in the second quarter, but we expect currency fluctuations to remain a challenge.

AIG has bounced back substantially since the downturn, and started paying out dividends last year. [3] However, going forward, AIG’s capital distribution strategy will be affected by its designation as a non-bank systemically important financial institution (SIFI) and the associated regulations with it. [4]

We have a price estimate of $50 for AIG’s stock, which is about in line with the current market price.

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Check out our complete coverage of AIG here

Property and Casualty

AIG is the eighth-largest U.S. property and casualty (P&C) insurer, with a market share of 3.29% in terms of premiums earned. [5] AIG offers both commercial and consumer insurance products in the P&C segment.

In the first quarter, net premiums earned were down by 4% year-over-year to $8.2 billion, while pre-tax operating income declined by 26% year-over-year to $1.2 billion. This was due to an increase in catastrophe-related losses, unfavorable loss reserve development and a dip in net investment income. The P&C combined ratio (loss to premiums ratio) was 101.2%, 3.9% higher than in the previous year. Both the commercial and consumer segments saw a rise in their combined ratios, by 5.5% and 3.5% year-over-year, respectively. [2]

In the upcoming results, we expect AIG to focus on improving underwriting profitability and take advantage of the gradual pick up in the U.S. economy, as the unemployment rate dropped from 6.3% in the months of April and May to 6.1% in June. [6] This was largely attributable to employment generation in the manufacturing and services industry, which also aids growth in the commercial P&C insurance business.

Life and Retirement

AIG is the 12th largest life insurer in the U.S., holding a 2.3% share in terms of premiums earned in a market led by MetLife (NYSE:MET). In the previous quarter, net income in the life insurance business was up 2% over the previous year to $1.4 billion on the back of increases in fees and premiums. [2]

We expect AIG to report further growth in this division for the second quarter. It will be interesting to see AIG’s progress on increasing distribution channels as well as pricing initiatives.

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Notes:
  1. AIG TO REPORT SECOND QUARTER 2014 RESULTS ON AUGUST 4,2014, Investor Relations []
  2. SEC 8-K Filing, May 5 2014 [] [] []
  3. AIG 10-Q Filing []
  4. Nonbank Financial Company Designations, Financial Stability Oversight Council []
  5. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2013 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM []
  6. Bureau of Labor Statistics []