One of the companies bringing up the rear of earnings season, AIG (NYSE: AIG ) is set to release its fourth-quarter and full-year financial results tomorrow after the closing bell, followed by a conference call Friday morning. As most investors know, the insurance giant has been struggling to regain investor confidence and continues to trade below book value, despite being a favorite among top money managers. For investors on the fence about AIG, this earnings release will be an important one to follow, so here are the three top things to look out for.
1. The effects of Hurricane Sandy
During the first three quarters of 2012, AIG had been following an upward trend. With a 6% increase in premiums written in its consumer property and casualty segment, the company was enjoying increased rates and a lower accident year loss ratio across all segments. But this was all before Hurricane Sandy reared her ugly head.
So far this earnings season, we've seen many other insurance companies reporting lower income based on the claims payouts related to Sandy:
|Insurer||Reduction in Profits|
|Allstate (NYSE: ALL )||45%|
|Progressive (NYSE: PGR )||3%|
|Travelers (NYSE: TRV )||52%|
One other insurer was affected by Sandy, but it did not feel the sting as badly -- Markel (NYSE: MKL ) . Since Markel specializes in high-risk policies, its higher rates plus other specialized business operations allowed it to swallow the costs of Sandy-related claims while still posting a 77% increase in profits.
AIG also specializes in certain policies, but it may not be able to perform like Markel. Since the insurance giant operates within niche markets, including a dedicated coastal condominium, hotel, and motel segment, it may report higher costs from Sandy claims. Analyst are expecting AIG to report a loss, and Sandy may have been the deciding factor that proves them right.
2. Balance sheet strength
Since the company shed its last remaining governmental ownership in December, you can be sure that investors will want to keep an eye on AIG's balance sheet going forward. Though the Fed will continue to regulate the insurance monolith, it is important for the company to continue its impressive increases in capital and monitor its debt. AIG already has a capital management goal of $25 billion-$30 billion by 2015 in place, with the company reaching the halfway point as of its September results. The company's ROE is 9.2% and continues to trend higher.
Since the company has already reduced its legacy derivatives operations by 92% through September, investors need to watch where AIG begins to invest its capital. And like the company, investors should monitor AIG's debt coverage, which is its ability to pay its obligations with its earnings. If analysts are correct and the company does report a loss for the fourth-quarter, listen carefully for indications of how the company will continue to pay off its debt -- most likely AIG will have to use its cash reserves.
Like all insurance companies, AIG is dependent on premiums growth. As it reported in the third quarter, P&C net premiums were up 4%, and premium rates in its commercial segment were up by 6%. This is a good combination for AIG, since a decrease in written premiums can often be offset by increased rates. Also, with the company's loss ratio declining year over year, it appears that the company is making strides in better underwriting practices for its policies, which can lead to reduced risk, leading to lower claim payouts.
Analysts anticipate a slowing of AIG's net premiums growth, expecting the company to report a 2% drop, but also noting that the decreases will slow as 2013 continues. While the fourth-quarter reduction in premiums may not be favorable to investors, they should have some comfort that the company will see improvement in the months to come.
In the end...
AIG is still a great investment opportunity. Though it is still the black sheep of the financial world, the company has been strengthening its books, reducing its risk, and improving its underwriting practices. All of these steps add layers of reasons for why the company will continue to improve -- and as it does, its stock will appreciate, closing off the opportunity to buy at a discount. The financial results we see in tomorrow's release and Friday's call will provide some clarity on the company's continued moves in the right direction.
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