1 Big Reason American International Group Isn't Your Average Insurer

Insurance is one of those necessary evils in life, which can be a great thing for investors. Though the market offers a plethora of companies to choose from, American International Group (NYSE: AIG  ) should be at the top of your list for one very good reason: It doesn't follow the pack.

Avoiding the obvious
What's the first thing that you think of when it comes to insurance? Probably your car, right?

Consumer auto insurance is one of the biggest markets within the insurance industry, thanks to the number of drivers on the road. But while the large volume of car policies may seem great at first, the market is incredibly cutthroat. Ultra-competitive pricing and a huge number of insurers offering coverage really cut into profits.

Instead of squabbling with all the players in the personal-automotive arena, American International Group plays a smarter move by focusing outside that division. This is central to AIG's MO: Instead of fighting the crowd in mature markets, it looks for opportunities to specialize. Though the company engages in several traditional lines of coverage, two of the megainsurer's divisions give serious credence to the benefits of specialization.

Private label
One of the big stories for AIG in 2013 was the overwhelming success of its private mortgage insurance operations. The company announced it would be reentering the market for mortgage guaranty early in the year and followed it up with a record year of new written premiums written -- a whopping $49.9 billion.

Source: Flickr / Mark Moz.

The 30% growth in new business, plus a decline in new delinquencies and claims, resulted in a 13-fold increase in the division's pre-tax income for the year.

One of the big factors in AIG success is the small number of companies vying for the new business. AIG is one of only a handful of PMI specialists -- allowing it to take full advantage of the big origination boom in the 2013 housing market.

Though new loan activity has dropped significantly since the third quarter of last year, AIG will have the upper hand once the housing market bounces back -- thanks to the small number of players in the this specialized market.

Insure to excess
The other market AIG dominates is excess/surplus insurance. This line of product offerings is highly specialized and includes coverage for high-hazard risks (think hurricane coverage for Gulf Coast properties), new markets (cyber security), and other unique risks (insuring an athlete's body part).

Because there are fewer regulations and fewer competitors within the excess/surplus market, insurers who successfully engage customers for their niche needs can adjust pricing for the specialty coverage, leading to higher profits.

One look at the market shows just how dominant of a player AIG is. Even though the company had a 4% drop in revenue in 2013, its 17% share of the market is still nearly three times that of its closest competitor:

Growth opportunities are still there
Cyber-threat insurance appears to be AIG's latest push within the excess/surplus market. It recently introduced a new add-on product to its current offerings that would provide protection against losses to property or person caused by a cyber threat.

Source: Flickr / Ivan David Gomez Arce.

Though the frequency of cyber attacks and breaches has been increasing, only 31% of businesses in the U.S. have cyber coverage, according to Experian. The current market of $1.3 billion in premiums is just a sliver of what AIG and the other niche players could bring in once the market matures a bit more.

Thinking outside the box
American International Group's deviation from the traditional lines of insurance products allows it to access consumers and businesses with specialized needs. By attending to these clients, the company sets itself up to take on higher risks, but at better (less regulated) pricing. And with the booming PMI operations, plus dominant excess/surplus division, the alternative risks prove to be one of the key reasons AIG is so prominent within the insurance industry, and a great investment opportunity.

2013 was great, but what's your portfolio doing in 2014?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks one stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year, his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252%, and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2935375, ~/Articles/ArticleHandler.aspx, 9/22/2014 12:17:07 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement