American International Group, Inc. (AIG) Earnings: Losses Hide Real Growth

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The analysts got it right. Predicting that insurer American International Group, Inc. (NYSE:AIG) would report a loss for the fourth quarter 2012 was correct, though it only covers one aspect of the company’s operations. When we dig a little deeper, it becomes clear that AIG has been improving its business in various ways that will allow it to continue growing and post profits down the line.

American International Group Inc (NYSE:AIG)Devil’s in the details
If we focus on the two main components that contributed to AIG’s fourth-quarter loss, it’s apparent that these one-time items do not reflect problems in the fundamentals of the insurer’s operations. A $4.4 billion loss from the sale of its aircraft leasing business and a $1.3 billion after-tax loss from paid claims related to Hurricane Sandy were the main factors leading to AIG’s $4 billion loss for the quarter.

Hurricane Sandy took a toll on most insurers, so AIG has plenty of company:

Insurer Reduction in Profits
AIG 348%
The Allstate Corporation (NYSE:ALL) 45%
The Progressive Corporation (NYSE:PGR) 3%
Travelers Companies Inc (NYSE:TRV) 52%

Sources: Company earnings releases and earnings reports.

While the effect of Sandy on AIG may seem extreme compared to the other insurers, keep in mind that AIG is the No. 5 property and casualty insurer in the country, only below Allstate, which is ranked No. 4 based on premiums written. In the past five years, Allstate had taken steps to reduce its exposure to states along the east coast, reducing Sandy’s impact on its financial results.

What’s actually going on
Despite Sandy, AIG’s accident year loss ratio continues to decline, down to 63.3% from 69.3% in 2011. This ratio shows the company’s yearly exposure to claims losses based on its earned premiums during that same time frame. And though AIG’s P&C net premiums written were essentially flat year over year, increased rates have helped it mitigate its losses. Commercial rates are up 6% since 2011, with the U.S. up 8.6%. Property rates alone have increased 14.6% since 2011. AIG’s consumer insurance segment has also grown, now accounting for 41% of the company’s P&C net premiums written — showing an increased focus on improving development across business segments.

Though its P&C business produced losses in the fourth quarter, its life and retirement service boosted operations. Increases across all types of assets under management lead to a 13% increase in total AUMs since 2011. The L&R segment has also enjoyed a 50% increase in variable annuity sales during the year.

AIG’s mortgage guaranty business is also picking up speed, though increased foreclosure timelines and changes to the ultimate cure rate caused a loss during the quarter. The delinquency rate for guaranteed mortgages covered by AIG has steadily been declining, and was down 5.1% compared to 2011. New insurance written in the mortgage guaranty segment was helped by increased mortgage origination during the quarter, jumping 63% year over year.

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