Decline In Net Investment Income Results In Earnings Miss For AIG
AIG (NYSE: AIG) reported soft second-quarter results as adjusted earnings per share of $1.05 missed market expectations. This quarter marks the fourth consecutive time that the company has missed EPS estimates. Moreover, the company’s stock has underperformed for the better part of this year, as the price declined from around $60 at the start of the year to the mid-fifties in March, and has been hovering around that range ever since. Overall, the company’s revenues declined 7% year-over-year as the General Insurance segment’s North American business saw a 15% dip in net investment income. This was primarily due to lower returns on alternative investments and weak hedge fund performance. Moreover, the combined ratio for the segment deteriorated by 790 basis points to 101.3%. However, the Life & Retirement segment’s performance was decent, as group retirement, life insurance, and institutional markets experienced modest growth.
Our interactive dashboard on Key Takeaways From AIG’s Q2 Earnings details our forecasts and estimates for the company. Below we discuss our expectations for the upcoming quarters.
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Completion Of Validus Acquisition Could Boost AIG’s General Insurance Segment
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. That said, it will take some time to create synergies. Furthermore, services and products from AlphaCat, which invest in insurance-linked securities (ILS) products for clients, could boost the company’s top line. Several pension funds are investing in ILS such as catastrophe bonds in hopes of getting better returns than traditional investments. Consequently, investment in ILS has jumped from $24 billion in 2011 to about $88 billion. This growth trend, along with AlphaCat’s expertise in such investment products, should generate higher asset management fees.
Life & Retirement Segment To Deliver Stable Results
AIG’s Group Retirement business delivered soft results as the loss of large plans drove up the surrender rate by 290 basis points to 10.9%. However, strong acquisitions and growth in periodic deposits led to 30.1% growth in premiums and deposits and we expect this to continue going forward. 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.
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