AIG Earnings Preview: Property & Casualty Insurance, Investment Income In Focus

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AIG (NYSE:AIG) is scheduled to report earnings for the first quarter of 2015 after markets close on Thursday, April 30. [1] AIG has progressed well recently in terms of increasing its operating efficiency. AIG’s property and casualty insurance business has been a key driver in the company’s turnaround. The P&C business contributed roughly 77% of the company’s total pre-tax operating income in 2014. [2] AIG’s efforts to improve underwriting discipline have also benefited the company. AIG’s life and retirement business has also experienced growth.

During year 2014, the company was affected by weak returns on investments as well as underwriting losses. As a brief recap, the company’s net income decreased from $9.1 billion in 2013 to $7.5 billion in 2014. After-tax operating income remained largely flat at $6.8 billion in 2014. In this note, we take a look at key metrics that will impact the company’s earnings in the first quarter of 2015.

See our complete analysis of AIG here

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Property And Casualty – Underwriting Will Be Key

AIG ranks among the top ten P&C insurers in the U.S. with a market share of 3.9% in terms of premiums earned. [3] In comparison, AIG’s  market share in 2012 was 4.52%. [4] The drop in market share has been partly due to the company’s efforts to improve its underwriting performance. AIG has been successful in reining in its underwriting losses, which declined from over $2.2 billion in 2012 (when hurricanes in the U.S. led to soaring catastrophe related expenses) to just $50 million in 2014. The combined ratio, or the ratio of claims to premiums earned, during this period improved from 110% in 2012 to 100.2% in 2014. Going forward, we expect the company to continue to focus on making underwriting gains, which could come at the expense of market share. However, the severe weather conditions in the U.S. during the first quarter could weigh on the underwriting performance.

Investment Income Will Be A Concern

The low interest rate environment has been consistently putting pressure on AIG’s investment returns. While the Fed is expected to raise interest rates in the near future, it may do so in a gradual manner. Since most of AIG’s investments are held in fixed-maturity securities and bonds, we expect the low interest rates to continue to pressure AIG’s investment income during the first quarter.

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Notes:
  1. AIG to Report First Quarter 2015 Results on April 30, 2015, Investor Relations []
  2. AIG 4Q14 Investor Presentation, Investor Relations []
  3. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2014 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM []
  4. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2012 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM []