AIG (
AIG
) is expected to report earnings for the fourth quarter of 2012
Thursday, February 21. Increased claims and expenses due to the
devastation caused by superstorm Sandy along the east coast of the
U.S. are expected to affect the top line for the quarter. But the
insurer has come a long way since being bailed out by the U.S.
government after the financial crisis in 2008, as the company has
restored its brand image and reputation. We will be keeping a close
eye on the results of the property and casualty insurance division,
which accounts for almost 60% of the company's revenues and
EBITDA.
Check out our complete coverage of AIG here
Damages From Superstorm Sandy
Around 5% of AIG's direct premiums originate in the state of New
York, which was the state worst hit by Sandy. The insurer estimates
losses to be around $1.3 billion net of reinsurance, compared to
$603 million in catastrophe related losses observed through the
first nine months of the year. In 2011, the company reported total
catastrophe related losses of $3.3 billion, influenced by floods in
the Tohoku earthquake and tsunami in the first quarter, tornadoes
in the U.S. during the second quarter, hurricane Irene in the third
quarter and floods in Thailand during the fourth quarter.
Net premiums earned during the first nine months of 2012 were in
line with the figure for the corresponding period in 2011, while
claims and related expenses declined by 14% due to fewer natural
disasters. This led to a narrower underwriting loss for the first
three quarters from $2.5 billion in 2011 to $838 million. However,
given the damage estimates from superstorm Sandy, we expect only a
marginal improvement in the company's margins for the fiscal
year.
We expect some residual claims in the coming years, but our long
term forecast is based on the assumption that there will be no
major catastrophes like Sandy and Irene in the coming years. We
expect the operating margin to return to its historical average,
and you can modify the interactive chart below to gauge the effect
a change in margins will have on our price estimate.
The Comeback Story
Following the 2008 financial crisis, AIG received a $182 billion
bailout from the government, the largest received by a private
company. Under public scrutiny, AIG renamed its international
P&C operations from AIU Holdings LLC to Chartis in order
dissociate the operations from the parent company. However, through
the divestiture of non-core assets such as Japan-based life
insurance subsidiaries, AIG Star Life Insurance Co., Ltd. and AIG
Edison Life Insurance Company, which were sold to Prudential
Financial (
PRU
) in 2010 and the American Life Insurance Company (ALICO), which
was sold to MetLife (
MET
), AIG was able to repay the Federal Reserve Bank of New York
(FRBNY) credit facility in full. The Treasury sold its stake in AIG
through a series of stock sales and ended up with a profit of $22.7
billion.
This allowed AIG to regain the public trust, despite
the recent Starr International
saga. The company re-branded its P&C division, Chartis, to AIG
Property Casualty and SunAmerica to AIG Life and Retirement in the
third quarter of 2012. This was quite important for AIG, as 50% of
the divisions net written premiums originate in the U.S. The
company already has an established distribution network of banks in
the country and will rely on its brand image to compete for share
in a mature market, which has around 2,500 P&C companies. We
expect a slight increase in AIG's market share in the coming years
and will be looking for progress in the fourth quarter report.
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