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."
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 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. Follow @PhilipvanDoorn