5 Things American International Group Inc.'s Management Wants You to Know

Here's what American International Group Inc.'s management has to say about the future of AIG's insurance businesses.

Sep 4, 2014 at 10:17AM

American International Group Inc. (NYSE:AIG), better known as AIG, is in the midst of one of the biggest management and operational transformations in quite some time.

After re-emerging from government hands, AIG has reshaped itself, refocusing on its core property and casualty business while casting aside non-core businesses such as airplane leasing. The result has been a stronger insurance company with improving profits. But it's no easy ride to recovery. 

On the most recent conference call, AIG's management made a handful of remarks that are important fodder for investors to consider. Here are the five most important takeaways.

1. It's focusing on its credit rating
Years of share repurchases and a newly increased dividend have done wonders for AIG shareholders, but what about the creditors? Management has an eye on improving AIG's ability to borrow cheaply, even if it may never again earn a sterling AAA credit rating.

CEO Bob Benmosche explained that while the company doesn't have too much debt, the required interest payments are keeping a better rating out of reach.

[W]e don't have a leverage ratio problem; it's a coverage ratio problem that we are working to fix with the rating agencies to make sure that we maintain [the credit rating], and quite frankly, I expect to improve our credit ratings.

2. It's Peter Hancock's domain now
Benmosche is stepping down as CEO. Peter Hancock is taking over the reins after a short stint as the president of the company's property and casualty unit.

Hancock laid out what his plan for the future will hold:

There [are] three points I would make. One, that there will be no abrupt change in strategy. This is clearly a vote for continuity. We are on the right track. We are in execution mode. Second, I remain very committed to focusing on value versus simply bulking up the volume of the company. And third, I will not be replacing myself with a head of [the] property casualty sector.

Hancock joined AIG as a complete newbie to insurance just two years ago. When he came aboard, he had a team of employees make him a 102-page guidebook on the vocabulary of insurance. Now, he'll be running the whole company.

The CEO change presents somewhat of a risk for investors. For one, Hancock isn't as seasoned as Benmosche, who had a successful career leading insurance stalwart MetLife from a mutual to stock insurer. But as the previous president of the P&C business, investors should take solace in the fact that Hancock does have experience running AIG's most important segment -- and he'll continue to preside over the business going forward.

It certainly doesn't hurt that one of the most highly regarded men in insurance, Ajit Jain, has said only the most positive things about the new chief of AIG.

3. The "new" AIG is just around the corner
The past few years have been marked by shrinkage, and a focus on the "core" insurance business. It's sold off a life insurance subsidiary and shares in AIA Group Ltd., and it dumped ILFC off to AerCap earlier in 2014. 

Only one final step remains: closing down the direct investment book. David Herzog, AIG's CFO, noted that the direct investment book should wind down naturally over time, stating that "nearly 80% of the DIB's debt matures by the end of 2018."

The plan is to wind down the investment book as debt matures over the coming years. Investors see the direct investment book as a treasure chest of wealth that could be used to fund bigger dividends and bolster share repurchase authorizations.

4. The market is softening
Benmosche pointed out, in no uncertain terms, that price increases in the company's commercial lines hit a wall.

"Commercial insurance rates overall were unchanged in the quarter and up 1% in the U.S. from a year ago."

This might not seem immediately noteworthy; however, one must consider the trajectory for U.S. commercial insurance lines over the last few years. When graphed, you can see the rather quick deceleration in pricing growth in AIG's disclosures over the years.

American International Group Pricing Trends

The message is simple: Margin growth may slow if pricing doesn't provide a readily available tailwind to premiums.

5. Mortgage insurance is firing on all cylinders
Mortgage insurance is promising to be a particularly lucrative business for AIG, though it's small relative to the company's major insurance lines. 

Benmosche pointed to recent trends in the business for reasons underlying its exceptional financial performance.

It's a business where you have a very attractive combined as long as the housing market stays as firm as it is and as long as employment trends stay as firm as they are. But it's a very attractive return-on-risk business at this point in the cycle and, as you can see from the delinquency trends, very, very attractive. About two-thirds of the business, the results are on business post-crisis.

The key point here is that as long as the economy is strong, and homes retain their value, AIG's mortgage insurance unit can continue to deliver excellent combined ratios. In the first six months of 2014, United Guaranty came out with a combined ratio of 50.4%.

Some 73% of the current risk in force (the amount of money it expects to pay in claims this year) comes from policies written after the financial crisis, which are substantially better risks than those underwritten during and before the financial crisis. 

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Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends, owns shares of, and has options on AIG. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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