EUR 850.00 For Business Accounts Only

Morningstar | AIG’s 2Q Shows Little Improvement

AIG’s second-quarter results largely mirrored its somewhat disappointing first quarter, with the company holding steady at an 8% adjusted annualized return on equity. Some issues in the quarter, such as lower investment income from alternative investments, we view as simply noise. But admittedly there were few signs in the quarter of progress on AIG’s primary issue, which is its poor commercial property-casualty underwriting results. However, CEO Brian Duperreault reiterated his goal of generating an underwriting profit by the fourth quarter, which strikes us as a reasonable timeline given the magnitude of AIG’s issues. We would reiterate our view that AIG’s historical issues primarily stem from mismanagement, and we draw confidence from Duperreault’s historical track record of success in the lines that AIG needs to remediate. We will maintain our $76 fair value estimate and no-moat rating.

There were few signs in the quarter that underwriting results are on a positive trajectory. Year-over-year comparisons suffer from a strong showing last year, but this quarter showed no improvement from more recent quarters on an underlying basis. The combined ratio for the quarter was 101.3% compared with 97.7% last year and 103.8% last quarter. Stripping out catastrophe losses and reserve development, the combined ratio increased slightly to 101.0% from 99.7% last quarter, as a modest improvement in the expense ratio was more than offset by an elevated loss ratio. Management pointed to a fairly high level of severe noncatastrophe losses as a culprit, and we’ve seen similar comments from other commercial carriers. Still, the quarter showed little sign of trending toward the underwriting profit that Duperreault has promised by the end of the year.

The one bright spot in terms of underwriting is that the company again reported a modest amount of favorable reserve development. In our view, given its history, AIG will need to string together a number of quarters of favorable development to restore confidence that its reserves are adequate, and this is another step in that direction.

The life insurance business saw a solid year-over-year earnings increase and generated an adjusted annualized ROE of 15%. While we don’t see life insurance as a structurally attractive business and believe the company should shed these operations once there are no material tax implications, life insurance is providing a bit of a boost at the moment.