Key Takeaways And Trends From AIG’s Q1 Results

AIG (NYSE: AIG) reported soft first quarter results, as EPS for the quarter missed the market expectations by a wide margin. Consequently, the day after the results, the stock price dipped by about 8% but has recovered slightly since then. Insurance companies can see earnings fluctuations due to some unpredictability related to claims, and this quarter was an example of that. $376 million catastrophe losses due to California mudslides and winter storms hurt the company’s earnings. Revenues declined 7.3% year-over-year on account of weak performances across segments. This, coupled with aforementioned catastrophe losses, meant that the company’s adjusted EPS decreased by 23.5% from $1.36 in Q1’17 to $1.04 in Q1’18. Moreover, adjusted return on equity declined to 7.7%.

Our interactive dashboard details our forecasts and estimates for the company. Below we outline the key takeaways from AIG’s Q1 and what to watch for going forward.

Weak Showing Across All Segments

Two critical metrics for an insurance company are the net written premium (NWP) and Combined Ratio. AIG’s General Insurance segment saw deterioration in both.

• General Insurance – Net written premiums for the segment were down 2%, mainly due to the lackluster performance of the North America business. Commercial lines had a soft quarter. The combined ratio for the North America business deteriorated by a hefty 1020 basis points due to catastrophe losses. However, the decline was slightly offset by growth in International business, which saw an 11% increase in revenue. This was driven by a positive impact from the Fuji merger.
• Life & Retirement – Revenue from the segment declined 6.6% on the back of soft results from the Individual Retirement and Institutional Markets businesses. For Individual Retirement, net flows declined due to competitive market rates and the unpredictability of regulations. Lower pension risk transfer deposits hurt the Institutional Markets business.  The other two businesses of the segment – Group Retirement and Life Insurance – did well, with revenue growth of 6% and 4.7% respectively. Growth in the Life Insurance business, especially, is good given the stable nature of the business. This was driven by solid growth in universal life deposits and international life and health premiums.

Future Outlook

The Validus acquisition looks like a sound decision for the company. The deal expands the company’s general insurance portfolio. With commercial property insurance potentially set to rise in 2018, largely due to catastrophes in 2017, AIG will benefit from having a partner that has deep expertise in this area. Also, with the deal, AIG will enter the crop insurance business, which should generate additional premiums. Per management, the deal should close in mid-2018. This means that the company would realize minimal benefits from the deal in Q2. That said, we expect the General Insurance segment and Life & Retirement segment to bounce back. The International General Insurance business will likely continue with its momentum.

We expect the company to generate about $12 billion in revenue in the second quarter. Moreover, we expect AIG’s adjusted earnings margin to improve in the near term. We forecast Adjusted Net Income of about $1.13 billion, or EPS of about $1.23.

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