AIG Pre-Earnings: P&C In Focus, Investments A Concern

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AIG (NYSE:AIG) is scheduled to report earnings for the second quarter of 2015 after markets close on Monday, August 3. [1] The last few quarters have seen  improvements across business lines at AIG, as operating efficiency has also improved. Property and casualty (P&C) insurance has been a key driver in the turnaround for AIG. During the first quarter, the company reported solid net income on the back of improvement in underwriting in the P&C division. During the second quarter, we expect AIG’s underwriting performance to further improve. However, the company will likely continue to be affected by persistent low interest rates, which will impact investment income.

In this note, we discuss the key trends that are expected to drive AIG’s earnings during the second quarter. We have a price estimate of $64 for AIG’s stock, which is slightly below the current market price.

See our complete analysis of AIG here

Will P&C’s Growth Momentum Continue?

The P&C division has played a key role in the turnaround of AIG’s fortunes after its bailout by the U.S. government. 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. [2] Owing to the company’s efforts to improve its underwriting performance, the combined ratio – the ratio of claims to premiums earned – in the commercial P&C segment improved to 97.1% in the first quarter compared to 98.9% a year ago. This was also helped by lower catastrophe-related losses. For the second quarter, we expect that AIG benefited from a lack of any major catastrophes. AIG’s competitors Hartford Financial (NYSE:HIG) and The Travelers Company (NYSE:TRV) both reported improved underwriting results for the second quarter as a result of the same factors. [3] [4]

Low Interest Rates, FX Headwinds Will Be A Concern

The low interest rate environment will continue to pressure AIG’s investment income. The company invests heavily in fixed-maturity securities, which are directly impacted by interest rates maintained by the U.S. Federal Reserve.

Owing to AIG’s international operations, the company is also vulnerable to FX headwinds. The U.S. Dollar has continued to strengthen against a host of international currencies, and we expect this to have an adverse impact on AIG’s earnings. [5]

Focus On Life And Retirement Business

While AIG’s P&C business has shown solid growth, things have not gone as well for the company’s Life and Retirement division. During the first quarter, premiums and deposits registered a decline, as lower interest rates affected the fixed annuity product line. The pre-tax operating income for the retirement solutions business declined by 19% y-o-y to $46 million during the quarter, despite growth in total assets under management and fees from variable annuity policies. [6]

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Notes:
  1. AIG to Report Second Quarter 2015 Results on August 3, 2015 []
  2. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2014 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM []
  3. Improved P&C Underwriting Lifts Hartford’s Q2 Earnings, Trefis []
  4. Strong Underwriting, Lower Catastrophe Losses Lift Travelers’ Earnings, Trefis []
  5. DOLLAR INDEX SPOT Exchange Rate, Bloomberg []
  6. SEC 8-K Filing []