AIG Earnings Preview: Underwriting, U.S. Business Growth In Focus

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AIG (NYSE:AIG) is scheduled to report results for the fourth quarter of 2014 on Thursday, February 12. [1] The company had an eventful year, with change at the top of its management team, with Peter Hancock taking over as the CEO and President in the third quarter. [2] AIG’s revenues during the first nine months of 2014 declined by close to 5% compared to the same period in 2013, while net income declined by around 4% year-over-year during the first three quarters of 2014. [3] Poor numbers in the life and retirement division had a significant impact on the company’s overall performance.

In this note we review key trends that will impact the quarterly results. We have a price estimate of $56 for AIG’s stock, which is about in line with the current market price.

See our complete analysis of AIG here

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Property And Casualty Underwriting In Focus

AIG’s P&C revenues for the first nine months of 2014 showed a marginal improvement of about 0.5% year-over-year, while pre-tax income increased by 1.5%. Gains made in the commercial P&C line of business were offset by an almost equivalent drop in the consumer P&C line. During the fourth quarter, the property and casualty insurance market saw a great improvement in underwriting performance. For instance, both Travelers (NYSE:TRV) and Hartford Financial (NYSE:HIG) posted improved combined ratios, benefiting from a relative lack of major catastrophic events during the fourth quarter of 2014. Accordingly, we expect AIG to also report a better underwriting performance for the U.S. P&C operations.

Life And Retirement

AIG holds about 2.3% of the life insurance market in the U.S. in terms of premiums earned. [4] Within this division, AIG offers individual fixed and variable annuities and group retirement benefit products. AIG is the second largest player in the U.S. annuities market and the third largest player in the variable annuities business in the U.S. [5]

In 2014, a significant drop in sales of institutional products led to a 9% year-over-year decline in revenues from the life and retirement division. The pre-tax operating margin for the first three quarters was close to 13.5%, a marginal improvement from the previous year.  Following the company’s restructuring, its operating margins have significantly improved.

FX Headwinds Will Have An Impact

Around 30% of AIG’s P&C premiums come from the Asia Pacific region, where the company has established operations in markets such as Japan, China, Korea, Singapore, Vietnam, Thailand, Australia and Indonesia. The Japanese Yen has weakened significantly of late, which will likely impact earnings. We already saw the negative impact from currency fluctuations when Prudential posted a 4% y-o-y decline in sales in dollars in the fourth quarter despite an increase in the number of policies in force.

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Notes:
  1. AIG to Report Fourth Quarter 2014 Results on February 12, 2015, Investor Relations []
  2. Peter D. Hancock Assumes Role as AIG President and Chief Executive Officer, AIG Press Release []
  3. SEC 10-Q Filing, October 2014 []
  4. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS LIFE AND FRATERNAL INSURANCE INDUSTRY 2013 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM []
  5. U.S. Individual Annuity Sales, Q3 2014, LIMRA []