AIG Shows Accelerated Earnings

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By Erik Waters on May 21, 2014 S&P 500

AIG is one of the few among the larger peer group to show accelerating earnings from 2013 to 2015. Compared with peers, the company has three meaningful drivers that should drive earnings above expectations. These include an accelerating life business, potential greater-than-expected capital return, and continued P&C margin improvement. AIG’s first-quarter P&C improvement was clouded by several factors (e.g., weather and reserve movements). We expect to see continued signs of core margin improvement throughout the year. We increased our capital return estimates on the higher-thanexpected repurchases in the first quarter, and it becomes increasingly likely that the ILFC sale will close in the second quarter. Life and retirement sales and asset growth are likely to continue at elevated levels and P&C will likely show gradually improving margins throughout the year.

Despite having a down day, we expect AIG’s stock to continue to have greater-than-average momentum to reflect continue improvement in fundamentals. Earnings revisions: We increased our 2014 operating earnings per share estimate slightly from $4.85 to $4.89. We increased our 2015 operating earnings per share estimate slightly from $5.57 to $5.61. The biggest upside to our number is likely in the property casualty segment. A 97% combined ratio in 2015 would increase our operating earnings per share estimate by $0.33 to $5.93. Key Factors Capital return estimates moving higher:

We increased our quarterly share repurchase projection for the remainder of the year from $500 million to $750 million due to the higher-than-expected share repurchase of $867 million in the first quarter. The regulatory approval of the ILFC deal, which is expected to close in the second quarter, will provide AIG with $2.4 billion of unencumbered capital and 97.6 million shares of AerCap. Given that AIG felt comfortable with $867 million of repurchases in the first quarter despite the deal not being completed yet suggests that the company is confident it will be able to continue repurchases throughout the year. Life and retirement earnings to remain at elevated level: We expect pretax operating income of $5.2 billion in 2014 and $5.4 billion in 2015, up from $5.1 billion in 2013.

Aggressive market share expansion in variable annuities and the pickup in fixed annuity flows contribute to our projection of AIG maintaining a high level of life and retirement operating profits. We expect assets under management to increase from $322 billion at the end of first quarter 2014 to $360 billion at the end of 2015. This growth in assets will provide AIG with greater earning potential even if yields were to not improve from here. Property casualty still on track: We have kept our 2015 combined ratio estimate firm at 98.9%, a 240-basis-point improvement over the full year 2013 result. Continued progress on the accident-year combined ratio is expected to drive operating earnings higher. Improved analytics, disciplined underwriting, and a shift from casualty into property lines of business should all contribute to an improving accident-year loss ratio.