3 Reasons to Love the AIG Earnings Report

It's been a long time coming, but American International Group (NYSE: AIG  ) is finally showing that it's back on track to once again becoming the insurance king it was before the financial crisis. With its first-quarter earnings release Thursday after the bell, the insurer has given investors some good news to head into trading on Friday -- a good start to the weekend.

Though there are sure to be some that still doubt AIG's resurgence, below is a list of three reasons to be excited about the company's most recent earnings report -- as well as one reason why you may hear it was disappointing.

No. 1: Income
While most headlines will note that net income dropped by $1 billion compared to 2012, the underlying facts about AIG's $2.2 billion earnings for the first quarter suggest that the company is really moving in the right direction. Last year's results included investment income generated by assets that were sold or liquidated during the year -- so comparing 2013 to that time period is an inaccurate way to determine if the insurer is making progress.

Insurance operating income jumped 28% compared to 2012, while investment income was relatively flat. The company has been working on both its underwriting practices and risk selection. And though the flat nature of its investment income may seem disappointing, all of the players in the insurance market have been dealing with pressure from the low interest rates. So the investment income generated by AIG is sign of strength in a difficult environment, with both positive returns from higher securities values and alternative investments. Competitor Allstate (NYSE: ALL  ) noted in its earnings report Wednesday that it was moving into more cash-generating investments that would ultimately lead to lower investment income in the future. AIG hasn't made the same move, and may end up benefiting from the decision to hold firm.

No. 2: Combined ratio
In the insurance industry, a company's ability to generate revenue from its insurance operations is usually measured by its combined ratio. As a tally of the company's costs and losses to its premiums, the combined ratio will give you the dollar amount of the money the company spends per $100 of premiums. AIG had a good quarter, with the company's overall combined ratio dropping 4.8 points. Compared to its closest competitors, AIG had the best improvement of the group:

Insurer 2013 Combined Ratio Improvement Over 2012
AIG 97.3 4.8 points
Allstate 87.7 0.4 points
Progressive 91.9 2.3 points
Travelers 88.5 3.7 points

Source: Insurers' first-quarter earnings press releases.

Though AIG may have had the best reduction, it still has the highest combined ratio of the players. The company's consumer insurance segment did have an increase in its combined ratio due to increased expenditures on new direct marketing as well as some increases in personnel expenses. If the insurer can continue to bring down its combined ratio, it stands to make a bigger impact on its bottom line.

No. 3: Goals
CEO Robert Benmosche noted that the company's goals for the coming months are to continue improvements in operations and cost reductions. With his comments in the company's press release, he noted that he is open to all opportunities to achieve those goals. So AIG has decreased its interest expense through calls and cash tender offers for outstanding debt. The AIG parent company has also allocated an additional $5.5 billion for future maturities. With half of the company's employees outside of the US, AIG is looking into new chances to implement changes with both personnel and technology to capture savings. By reducing costs, the company will also be reducing its combined ratio, which will bring it closer to the levels achieved by its closest competitors.

A reason to hate?
While the majority of its rivals reported increases in premiums, propelling revenue higher for the first quarter, AIG reported a 4.3% decrease in net premiums. Without the ability to raise premiums, AIG will be limited in its opportunities to grow revenue streams from its insurance operations. But without the impact of currency exchange rates, catastrophic loss bond issuance, and some other factors, actual premiums grew by 4% during the quarter -- more closely aligning AIG with the improvements seen with other insurers' earnings reports.

During the first quarter, AIG's book value has continued to rise, topping out at $59.39 -- a 12% increase from the prior year. For current investors in the insurer, this is great news, as the company's stock continues to trade below book value. For prospective investors, this poses a 41% upside from AIG's closing price on Thursday of $42.13.

As we move past earnings season, be sure to keep an eye out for more news of AIG developments. The company's goals are aligned with a true desire to improve itself and move past the legacy of a failed institution from the financial crisis. With many on Wall Street behind it, more and more investors may find a new opportunity with AIG.

Editor’s note: A previous version of this article incorrectly stated that the combined ratio measures what a company keeps per $100 of premiums, instead of spends. It has been corrected. The Fool regrets the error.

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  • Report this Comment On May 03, 2013, at 11:05 AM, TEBuddy wrote:

    AIG is a great pick, I picked it up in the mid $20s, when everyone was blinded by the bailout period. AIG did not cause the recession, people's spending more than they should have did, and irresponsible banking and rating agencies did. AIG was three times removed from the root cause, and ground zero for the recovery. Just goes to show you how the media and Government can manipulate people. AIG is back on track and will continue to grow again. It is a no-brainer to me, and I bought more when it was in the mid $30s.

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