- Life And Retirement constitutes 55% of the Trefis price estimate for AIG's stock.
- General Insurance constitutes 40% of the Trefis price estimate for AIG's stock.
WHAT HAS CHANGED?
Latest EarningIn Q1 2022, AIG reported Total Revenues of $15.8 billion, 9% more than the year-ago period. This could be attributed to a 9% y-o-y increase in the premiums, partially offset by a 11% drop in the net investment income. Further, total net realized gains (losses) improved from $3.25 billion to $4.42 billion in the quarter.
Impact of coronavirus outbreakAIG’s suffered in 2020 as states and countries were on lockdown due to Coronavirus pandemic. This resulted in lower premium revenues for the company as business and individuals would be more focused on the short term. Further, the insurance companies are heavily dependent on income from investment of insurance premiums for their profitability, which decreased due to lower asset valuations driven by the economic slowdown. While the Q3 and Q4 2020 results were on the similar lines, it reported a decline in premiums in Q4 FY2021 as well.
The company reported $52.1 billion in revenues for 2021.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below we look at the key drivers for AIG with potential upside or downside to the AIG’s stock price.
- General Insurance International Net Premiums Earned International premiums account for about 51% of the total premiums earned by the General Insurance segment in 2019. Over 2015-2017, the division experienced a decline in premiums due to the strengthening of the U.S. Dollar, especially against the Japanese Yen. Japan is a key market for the company. While the International premiums increased by almost 4% in 2018, it again dropped by roughly 11% in 2019 due to lower Accident & Health business in Asia Pacific, underwriting actions to maintain pricing discipline, Japan Merger Impact in 2018 and higher ceded premiums due to changes in 2019 reinsurance programs.
Trefis expects that AIG’s premiums from its General Insurance international operation will see sluggish growth in the coming years from about $14.1 billion in 2021 to around $16 billion by the end of the Trefis forecast period. Further, owing to intense competition from the company faces from other insurers, AIG could fail to capture additional share in this fast-growing market. There is about 2% downside to the Trefis price estimate for AIG’s stock if premiums from International increase to only about $14.4 billion. However, if AIG manages a deeper penetration in the Asian market, premium growth to $19.8 billion will result in a 4% upside.
- Validus Acquisition Could Be The Game Changer For General Insurance North America Operations North America premiums account for about 49% of the total premiums earned by the General Insurance segment in 2019. Over 2015-2017, the division has experienced a decline in premiums on account of lower production in casualty, commercial property, and higher ceded premiums. However the situation improved a bit in the subsequent years with the north America premiums increasing from $11.5 billion in 2017 to $12.9 billion in 2019, due to the inclusion of the Validus and Glatfelter acquisitions as well as growth within the Validus business The Validus acquisition looks like a sound decision as the deal adds businesses that the company had never ventured into or had pulled out from, thereby expanding its general insurance portfolio. This should generate additional premiums while giving AIG access to Validus’ customer base to cross-sell its products. Also, with the deal, AIG will enter the crop insurance business, and Talbot, an operator in Lloyd’s insurance market, will re-introduce AIG to complex, but profitable underwriting areas. The figure was around $11 billion in 2021.
There is about 3% upside potential if premiums from North America General Insurance Segment reach $15.5 billion by the end of the Trefis forecast period.
American International Group, Inc. (AIG) is a leading provider of life insurance and retirement solutions. The company also provides property and casualty insurance products such as workers’ compensation, automobile liability, general liability, etc. AIG has a global presence in nearly 80 countries, but its primary markets are the U.S., Europe, and Japan.
Downfall in life and health insurance market
The employment level in the economy has a major impact on the life and health insurance business. Due to the effect of coronavirus pandemic and economic slowdown, the U.S. economy could see significant job losses. Further, health insurance claims increased in 2020 due to the Covid-19 health crisis. Going forward, we expect the the life and health insurance market to struggle in the near term.
Investment Income To Decline In The Near Term
The last couple of years have resulted in subdued returns on investments, which are a crucial income source for insurance companies. Insurance companies typically depend on investment income to pay off their liabilities (insurance benefits, claims, and dividends). Lower investment incomes have also pressured operating margins. Going forward, as coronavirus pandemic coupled with oil price war could lead to economic slowdown. This should lead to lower returns on invested assets for the insurance company in the near term.