A Look At AIG’s Key Sources Of Value

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AIG: American International Group logo
AIG
American International Group

AIG (NYSE: AIG), one of the leading insurance companies in the world, is structured into four segments – General Insurance, Life & Retirement, Other Operations, and Legacy Portfolio. Below, we expand on these segments, their historical performance, and our expectations going forward.

  • General Insurance, the largest segment, is geographically divided into two regions – North America and International – and provides coverage to both businesses and individuals across the world. The solutions include liability, financial lines, property, special risks, personal lines, and accident & health products and are distributed via multiple channels such as captive and independent agents, brokers and retailers. The segment’s revenue has been on a downward trend over the last few years and 2017 was no different. The 10.4% dip in revenue was largely driven by a subdued performance from North America, which saw a 14.1% decline. This was largely due to the company’s initiatives to maintain pricing discipline and underwriting actions to strengthen the portfolio, resulting in lower production in casualty, commercial property, and D&O products in Financial Lines. Net premiums from the international segment declined as AIG sold its interest in the Ascot business and production in Japan declined. On the bright side, the segment earned higher net investment income on the back of higher income from alternative investments and gains on securities at fair value.
  • Life & Retirement encompasses individual retirement, group retirement, life insurance, and institutional market products. 2017 was a good year for the segment, as revenue grew 13.1%. The largest contributor to this growth was the pension risk transfer (PRT) business, which saw an impressive 121% year-on-year growth. This, along with premiums generated from the business distributed by Laya Healthcare and growth in international life and health products, fueled the growth. However, individual retirements had a weak year as premiums and deposits decreased on account of the low interest rate environment and unpredictability around the execution of the DOL Fiduciary Rule.
  • Legacy Portfolio consists of products and solutions that have either been exited or discontinued. The products are no longer marketed and include coverage related to asbestos and environmental exposures, public entity liability, and physicians and surgeons professional liability. The segment has been on a decline and in 2017 disposed of its entire life settlements portfolio with a face value of $9.8 billion to pay intercompany loans.
  • Other Operations consists of products and solutions that are separate from the General Insurance and Life & Retirement segments. The smallest segment includes products from subsidiaries such as AIG Blackboard, corporate expenses, deferred tax assets, and intercompany eliminations.

We have created an interactive dashboard analysis that shows AIG’s key revenue sources and the expected 2018 performance. You can adjust the revenue drivers to see the impact on the overall revenues, EPS, and price estimate.

Validus Acquisition To Boost AIG’s General Insurance Segment

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Ever since the Federal Reserve’s massive $150 billion bailout of AIG during the financial crisis, the company’s strategy to sustain long-term has been to dispose of underperforming businesses. As a result, the company’s size has shrunk over the years. However, the company executed its first major deal of the decade, a $5.6 billion acquisition of Validus Holdings, a leading reinsurance company. The acquisition looks like a sound decision for the company as the deal expands 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. That said, it will take some time to create synergies. Meanwhile, per NOAA’s (National Oceanic and Atmospheric Organization) prediction, which has been reliable in the past, the number of hurricanes could be lower than last year. While this bodes well for insurers because of lower expected catastrophe losses, it also means that product pricing could go down, thereby negatively impacting the net written premiums.

Life & Retirement Segment Could Experience Some Pressure

Last quarter was somewhat weak for the Life & Retirement segment, as fixed annuity and variable annuity sales declined on account of negative net flows, and we expect it to remain negative in the next few quarters. More importantly, the largest contributor to the segment’s 2017 success, the institutional market, saw a sharp decline in revenues as the company did not manage to participate in any notable pension risk transfer transaction. This will likely change further into the year given that plan sponsors are getting increasingly interested in PRT transactions. In the Life Insurance business, a diversified product mix should continue to generate high-level premiums. Meanwhile, the combination of VALIC Financial advisors and the company’s technological improvements will likely help AIG’s position in the not-for-profit defined contribution market.

We have a price estimate of $64 for AIG, which is ahead of the current market price. This is based on revenue projections of about $49 billion. Furthermore, we expect AIG’s net margin to expand due to its focused approach on technical underwriting. We forecast net income of about $4.65 billion, or EPS of about $5.11. Finally, using our estimated P/E multiple of 12.5 gives us $64 as a fair price estimate. Disagree? Detailed steps to arrive at AIG’s price estimate are outlined in our interactive dashboard, and you can modify our assumptions to arrive at your own estimate for the company.

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