EUR 850.00 For Business Accounts Only

Morningstar | American International Group Generates an Underwriting Profit in the First Quarter

American International Group’s first quarter provided some evidence that the long-hoped-for improvement in the company’s underwriting results may have arrived. This, combined with a good showing from life insurance operations and strong investment results, led to a 12% annualized adjusted ROE. With the company now seemingly under competent management, we have argued that some reversion toward peers should be expected, and this quarter supports our view. We will maintain our $76 fair value estimate and no-moat rating.

CEO Brian Duperreault put out a clear target last year when he stated that AIG’s P&C operations would produce an underwriting profit in 2019, and in the fourth quarter he went further and declared that AIG would hit this mark in the first quarter. Having put his credibility on the line, we are pleased to see him deliver with some room to spare, with the company’s P&C operations generating a 97.4% combined ratio in the first quarter. This marked a significant improvement from last year’s level of 101.3%, despite slightly higher catastrophe losses. AIG saw improvement on both fronts, with its loss ratio declining materially year over year, and a 200-basis-point decline in its general operating expense ratio, reflecting management’s efforts to control costs. While this is just one quarter and the company has further work to do, we think improving the underwriting in AIG’s P&C operations is the one material barrier to adequate returns over time, and Duperreault has provided some evidence that his team is capable of doing just that.

By region, International P&C operations saw a stronger improvement, with North American results somewhat held back by a higher loss ratio in personal lines. However, we believe commercial lines are more important to watch, given that AIG’s biggest historical stumbles were in commercial lines, and both North American and international commercial lines generated combined ratios of 97.7% and 96.0%, respectively, both well below the 100% threshold. We have heard commentary from multiple carriers this quarter suggesting pricing is improving in commercial lines. This alone is likely not enough to generate material improvement in underwriting margins for AIG but could turn what has been a modest headwind into a tailwind going forward.

Life insurance operations turned in a good quarter, with all segments except group retirement seeing a year-over-year improvement in adjusted pretax income, and the segment as a whole generating an annualized adjusted ROE of 15%. While we don’t see life insurance as a structurally attractive business, we are impressed with the company’s ability to generate solid returns in this area over the past couple of years.

The quarter was aided by fairly strong investment results due to a bull equity market and credit spreads narrowing. We don’t make much of the quarter-to-quarter noise in investment results for P&C insurers, and the double-digit adjusted ROE in the quarter appears to have been in part due to investment results that are likely not sustainable going forward. In our view, the company still has a ways to go to reliably generate adequate returns, but the quarter represented good progress toward that goal.