What To Expect From AIG’s Q2 Results

AIG (NYSE:AIG) is scheduled to report earnings for the second quarter of 2016 on Tuesday, August 2. The company has struggled somewhat over the last couple of quarters, with declining profitability in its Property and Casualty (P&C) business and deteriorating investment income. In the first quarter this year, AIG’s after-tax operating income declined to $0.65 per share compared to $1.22 a share in the prior year quarter. This was also considerably lower than analyst consensus estimates of $1.00 a share, and was primarily driven by lower income on alternative investments.

Interest rates have remained low since then, and economic uncertainty due to the U.K.’s Brexit vote has pushed government bond yields to extremely low levels, with German and Japanese bond yields entering into negative territory. This is likely to have adversely impacted AIG’s investment income in the second quarter as well. In the upcoming earnings, we expect AIG’s revenue and earnings to decline in double-digits, in line with consensus estimates compiled by Reuters. See our complete analysis of AIG here

How Will The P&C Business Perform?

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 3.23% in terms of premiums earned. In Q1 2016, P&C division’s overall revenues declined by 10% year-over-year to $6.2 billion and pre-tax segment operating income declined by 39% to $889 million on lower investment income.

The company’s combined ratio – the ratio of claims and expenses paid to premiums earned – improved marginally from 93.4% in Q1 2015 to 93.2% in Q1 2016, as higher catastrophic losses (due to windstorms and hailstorms in the Americas) were offset by a lower expense ratio. For the second quarter, we expect catastrophe losses to remain high due to severe hailstorms in Texas. The Insurance Council of Texas reported last month that insurance and reinsurance companies are set to pay for losses totaling about $2 billion due to severe hailstorms striking the state in April. AIG’s competitors Hartford Financial (NYSE:HIG) and The Travelers Company (NYSE:TRV) both reported slightly underwhelming underwriting results for the second quarter as a result of the same factors. However, AIG might still be able to keep its combined ratio in check if it can manage a low expense ratio (ratio of funds operating expenses to total assets) like it did in the first quarter. ^{[1] [2]}

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1. San Antonio, Texas hailstorm insured losses to pass $2 billion, Artemis.bm, June 3 2016 [↩]
2. 2015 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM, NAIC, March 28 2016 [↩]