Business Strategy and Outlook
The years since the financial crisis have shown that American International Group would have destroyed substantial value even if it had never written a single credit default swap, had noncore businesses it needed to shed, and had material issues in its core operations that it needed to fix. It is encouraging, however, by the recent progress in terms of improving underwriting margins, and the plan to take out $1 billion in costs by 2022 would be another material step. In 2020, the impact of the coronavirus has obscured the company’s progress, but it is held results over the past year have been encouraging. COVID-19 losses to date have been very manageable. As a percentage of capital, losses have stayed well within the range of historical events that the industry has successfully absorbed in the past.
The longer-term picture looks relatively bright. The pricing environment has not been particularly favorable in recent years. However, in 2019, pricing momentum picked up in primary lines, and this positive trend only accelerated in 2020. More recently, pricing has started to plateau, but the industry has enjoyed the highest pricing increases it has seen since 2003. While higher pricing is necessary to some extent to offset lower interest rates and a rise in social inflation, pricing increases appear to be more than offsetting these factors. As a result, commercial P&C insurers are experiencing a positive trend in underlying underwriting profitability, and potential for a truly hard pricing market can be seen, similar to the period that followed 9/11.
It is seen AIG has made material progress in improving its under/over the past couple of years, and has set a target for an underlying combined ratio below 90% by the end of 2022. Assuming an average level of catastrophe losses, it is likely this is a level that would allow P&C operations to achieve an acceptable level of return, and a harder pricing market may make hitting this target easier.
Financial Strength
It is alleged AIG’s balance sheet is sound, although the company is arguably in a somewhat weaker position than peers until it can improve profitability. Equity/assets was 13% at the end of 2021. This level is lower than P&C peers but reasonable if AIG’s life insurance operations, which operate with higher balance sheet leverage, are considered. During 2014, the company reduced its debt load by about $10 billion and eliminated much of its high-coupon debt, which improved its financial flexibility. Barring any unforeseen events, it is anticipated the company has room to continue to return capital to shareholders, and management had been returning a lot of capital to shareholders, in part through divestitures and some restructuring, although in recent years management has curtailed buybacks as AIG pivoted toward growth and acquisitions have become part of the strategic plan
Bulls Say’s
- The aftermath of AIG’s issues during the financial crisis occupied much of management’s attention for quite some time. With these issues resolved, management can focus on the company’s operations, and there could be ample scope for improvement.
- AIG has demonstrated progress in improving underwriting margins in its P&C business.
- The current focus on risk-adjusted returns sets a proper course for the company, and just increasing profitability to the level of its peers would represent a material improvement.
Company Profile
American International Group is one of the largest insurance and financial services firms in the world and has a global footprint. It operates through a wide range of subsidiaries that provide property, casualty, and life insurance. Its revenue is split roughly evenly between commercial and consumer lines.
(Source: MorningStar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
