Benmosche Triumphs as AIG Swings to P&C Underwriting Profit (Update 1)

Updated from 9:42 a.m. ET with very strong morning action for AIG's shares, along with comment from William Blair analyst Adam Klauber.

NEW YORK ( TheStreet) -- "Since mid-2011 the focus of our company has been to get the fundamentals right."

That's how American International Group CEO Robert Benmosche began the company's earnings conference call on Friday morning, after the company late on Thursday reported a first-quarter underwriting profit for its property and casualty insurance business.

The first-quarter results showed an "inflection point" in the company's transformation, according to BernsteinResearch analyst Josh Sterling.

Over the past year, AIG has lagged its major U.S. property and casualty insurance competitors, by continuing to show underwriting losses, because of low premium pricing and higher accident year loss ratios. But both of these areas have been steadily improving under Benmosche's leadership. He also succeeded in moving the company past its epic bailout by the U.S. government at the end of last year, with U.S. taxpayers ending up with a $22 billion profit.

AIG reported first-quarter operating after-tax income of $1.982 billion, or $1.34 a share, compared to $290 million, or 20 cents a share, in the fourth quarter, and $3.046 billion, or $1.62 a share, in the first quarter of 2012. The fourth-quarter results were lowered by $2.0 billion ($1.3 billion after tax) in losses from Superstorm Sandy, while the first quarter 2012 results included $3.3 billion in pretax gains on the sale of several investments.

The first-quarter after-tax operating earnings greatly exceeded the consensus estimate of 87 cents, among analysts polled by Thomson Reuters.

AIG's shares were up 6% in morning trading, to $44.57.

For its Property Casualty insurance segment, AIG reported pretax income of $1.604 billion, compared to a loss of $983 million in the fourth quarter (from Sandy) and $910 million in the first quarter of 2013. Because of Sandy's gross effect on the fourth-quarter numbers, the following will only include year-over-year comparisons.

AIG reported a P&C underwriting profit of $231 million in the first quarter, compared to an underwriting loss of $180 million a year earlier.

AIG has traditionally been known to undercut competitors on pricing in order to gain P&C market share, but this has been changing under Benmosche's leadership. The company said in its earnings release that Property Casualty "improved underwriting margins were driven by a shift in the portfolio mix, the benefits of underwriting improvement initiatives, which are enhancing our risk selection, and increases in pricing."

The property and casualty unit had a loss ratio -- losses either paid or for which reserves were set aside, divided by premiums earned -- of 63.3% for the first quarter, improving from 68.0% during the first quarter of 2012.

The unit's combined ratio improved to 97.3% in the first quarter from 102.1% a year earlier. The combined ratio is an insurance group's losses plus expenses divided by premiums earned. A ratio above 100% indicates an underwriting loss, and it is quite significant for AIG to bring the combined ratio below 100%.

Sterling rates AIG "outperform," and in a note to clients early Friday raised his price target for AIG's shares to $60 from $45. According to Sterling, the main factor in the company's operating earnings improvement was "the broad risk-on rally we've seen since the first of the year, which led to mark-to-market gains for all manner of risky assets--benefitting AIG's results in practically all of its material segments."

The analyst wrote that the improved combined ratio was "the most important thing in the firm's release," adding that "the company's transformational initiatives are starting to be reflected in the firm's numbers, the firm's best-in group disclosures."

Being called "best-in-group" for reporting quality among major P&C competitors including Allstate ( ALL), Berkshire Hathaway ( BRK.B), Chubb ( CB) and Travelers ( TRV) is just another in a series of investor-friendly developments surrounding AIG.

While writing "this is likely to be a better than trend quarter," with unusually low expenses and seasonal advantages, Sterling added that "it clearly establishes that the firm is control of its business, and is marching down a path to achieve the 2015 margin goals that it first set in 2011."

Benmosche's long-term goals for AIG include a return on equity (ROE) of 10%. For the first quarter, the company's ROE was 8.9%.

Sterling on Friday raised his 2013 earnings estimate for AIG to $3.64 a share from $3.60, while raising his 2014 EPS estimate to $4.85 from $4.34.

AIG's shares closed at $42.13 Thursday, rising 19% year-to-date, and trading for 10.4 times the consensus 2014 EPS estimate of $4.06, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate will rise considerably over the next few days, as several analysts have already raised their earnings estimates.

William Blair analyst Adam Klauber on Friday said in a note to clients that "this is the first quarter since second quarter 2009 in which AIG reported a combined ratio under 100%, and it did significantly better than that with 97.3%."

"There was little movement on reserves and it appears that the rate increases and nonrenewal of casualty business led to accident‐year loss ratio gains compared with a year ago," Blair wrote. "With parent liquidity of $15 billion and improving profitability in property casualty, prospects over the next year look bright for AIG, and this quarter signals a higher likelihood of a dividend being instituted this year and for AIG to generate higher levels of earnings going forward."

According to Klauber, further increases in earnings "will be key to use the $17 billion deferred tax asset on the balance sheet." That's quite a bit of potential capital that can be deployed through dividends and/or share buybacks.

Klauber also pointed out that "even with the recent run‐up, the stock is trading at only 0.63 times book, and it could expand from here."

AIG Chart AIG data by YCharts

Interested in more on American International Group? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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