When insurance giant American International Group Inc (NYSE:AIG) announced its second-quarter earnings back in August, investors and analysts alike were happy to see that the company was still producing impressive results. And with investors turning their focus toward growth — since cost-savings opportunities for most companies have likely played out already — it was important for the insurer to display the solid growth captured during the latest quarter. And though the numbers were impressive on their own, digging a bit deeper will give AIG’s shareholders some longer-lasting confidence that the insurer will produce the same type of results in the quarters to come.
Here are the top three drivers behind American International Group Inc (NYSE:AIG)’s growth opportunities.
1. Escalating policy rates
One of the key determinants of American International Group Inc (NYSE:AIG)’s success in its Property and Casualty division was the solid rise in policy rates in most of its lines. Commercial rates in the U.S. alone rose 7.3% during the quarter, and though the company reported continued softness and competition in international markets, it’s their domestic lines that most needed the boost. Since Hurricane Sandy, the insurance market has been transitioning to a “harder” environment, allowing insurers to justify increasing premiums.
2. International markets
American International Group Inc (NYSE:AIG) operates in 90 counties, and the second quarter marked yet another period of improvements around the globe. Though, as mentioned above, its operations faced higher competition and softer pricing, the insurer recorded 18%+ growth in the majority of its international commercial lines. These markets represent a smaller piece of the company’s overall commercial insurance franchise, providing opportunities for expansion.
One of the key moves American International Group Inc (NYSE:AIG) initiated in the second quarter is the consolidation of its Japanese segments, the merger of AIU and Fuji Fire and Marine. Both firms are highly established insurance providers in the Japanese market, and by combining them, AIG aims to not only cut costs, but find new opportunities in providing products and service to customers. Much like the Japanese merger, which is targeted to close sometime in 2015, AIG combined 25 European entities into a single legal entity toward the end of 2012 in order to streamline operations.
The expansion and consolidation in international markets may open up new opportunities for American International Group Inc (NYSE:AIG) in an environment that could allow greater chances than domestic expansion. When discussing the international operations in the second-quarter earnings call, both Jay Wintrob, Executive VP of Life and Retirement Services and John Doyle, CEO of Global Commercial Insurance, noted that international operations provide a better return on equity because of a lesser dependence on investing income. Doyle specifically noted that most major lines outside of the U.S. cover their cost of capital at current operating levels. So although the new plans internationally do pose upfront costs, the ROE may prove more worthwhile for shareholders in the long term.
There are two products central to American International Group Inc (NYSE:AIG)’s growth in the second quarter: private mortgage insurance and annuities. In both cases, interest rates play an important role in the insurer’s performance going forward.
There has been no shortage of growth in the mortgage guaranty market, with most of the private players raking in plenty of dough during the second quarter. As home prices increase and sales continue, American International Group Inc (NYSE:AIG) and its rivals will likely see more opportunities for expansion with loans that require mortgage insurance. But the impact of rising interest rates on the pace of home sales is still being debated and could stymie the gang-buster growth AIG has reported for the past two quarters.
But rising interest rates have been the driving force behind the insurer’s record level sales of fixed annuities during the second quarter. Since the company reprices these products each week, it can capture the benefits of increases quickly.
Many of American International Group Inc (NYSE:AIG)’s rivals aren’t as well positioned to take advantage of this opportunity because of their reductions in exposure to annuities after the low interest rate environment made the product an underperformer. In 2012, both Sun Life Financial Inc. (USA) (NYSE:SLF) and Genworth Financial Inc (NYSE:GNW) exited their respective annuities businesses because returns on capital were no longer worthwhile. MetLife Inc (NYSE:MET) and Hartford Financial Services Group Inc (NYSE:HIG) also reduced some of their exposure by offering to buy out some annuities contracts from customers or otherwise reducing benefits.