3 Things to Watch for in the AIG Earnings Report

This week is a big one for financial information releases. And not to be overshadowed, American International Group (NYSE: AIG  ) will release its second-quarter earnings report on Thursday after the bell, with a conference call to follow on Friday morning. The insurance giant has been steadily building itself back up after the financial crisis, and with consecutive quarters of success under its belt, investors are sure to be watching this earnings report closely. Here are three things to watch for from AIG.

1: Skewed results
AIG has beaten analyst estimates for the past four consecutive quarters, but the first quarter's results were slightly off-putting to investors and analysts at first glance. Because the company was reporting a year-over-year decline, most initial reactions were that the company wasn't going in the right direction, but the opposite was true. In its quest to realign operations with its traditional insurance pedigree, the company had sold many of its non-core businesses in 2012, thus skewing the organic earnings growth.

Investors shouldn't be surprised to see a similar occurrence in the forthcoming second-quarter results. But be assured that AIG has focused on creating a leaner, meaner, earnings-generating machine.

2: Specific focus on three key areas
Changes in the market over the past several months will put pressure on AIG to address how it's been handling those complications in order to assuage any investor concerns. First, the speculation over Fed stimulus changes has affected interest rates, the bond market, and of course the equities market. Because investment income is such a huge part of an insurance business's revenue stream, pressure on all three aspects of investing may have affected the valuation of AIG's investment portfolio.

Keep an eye out for any sign that the company has changed its strategy. For example, in its first-quarter earnings report, rival Allstate (NYSE: ALL  ) noted that it would be focusing on more cash-generating investment options to align itself more with the low interest rate environment. AIG hasn't noted any such changes, but investors should be aware that doing so may forfeit future investment income.

Second, progress in Asian markets will be another important area of focus for AIG investors. With the company essentially doubling down on its investment in the PICC Group in China, its exposure may become a liability if growth continues to slow in the People's Republic. Also, the insurer just announced recently that it would be restructuring its operations in Japan -- another country that has been struggling financially as of late.

And finally, the traditional measure of an insurer's progress with cost management -- the combined ratio -- will be scrutinized as usual. 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 the largest decrease in its combined ratio when compared to rivals, but it still had the highest ratio of the group. Traveler's Companies (NYSE: TRV  ) , which reported earnings last week, reported a 6.3 point decline for its combined ratio, so AIG investors should be looking for a similar result.

3: Reductions in debt
As CEO Robert Benmosche noted in the first-quarter earnings conference call, AIG has been purposely delaying the reinstatement of a dividend or share buyback plan until other operational goals are met. Most talked about during the call was the company's efforts to cut down its debt burden and reduce interest expenses. The company has made a huge dent in this goal, but investors should be looking to see if there are any more indications that AIG has further to go. Meeting the goals set forth in the first-quarter earnings report will bring investors another step closer to some capital disbursements. Allstate recently announced a $0.25 per share dividend for investors, so AIG's investors may be chomping at the bit for a similar announcement.

What's cookin', good lookin'?
Though there are plenty of extraneous items that could be causing investors some concern, the insurer has been focusing on getting operations into ship-shape, with long-term growth in mind. As long-term investors, the items noted above will be keys to determining whether or not the company is setting the right goals and meeting them. Be sure to log in to Fool.com later in the week for coverage of the actual results.

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  • Report this Comment On July 31, 2013, at 11:40 AM, blogd2death wrote:

    Jessica, beg to differ. AIG has been very clear about adjustments they are making and have made

    in the low interest rate environment. Specifically they have addressed investing in different higher yield instruments in the life company. Also Asia can slow down a ton and it is till the most capable market of insurance buyers in the world that has not been penetrated. I totally agree focus on the combined ratio is key.

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