Next Monday, after the closing bell, American International Group (NYSE:AIG) will release its first-quarter earnings data, with a conference call the following morning. Though there is always a ton of information to digest every earnings season, here are three things AIG investors should keep in mind when the mega-insurer reports.
Since the financial crisis has been mostly cleaned up, growth is the one thing investors continually look for during earnings season.
2013 was a great year for the insurer, with growth in all core insurance operations boosting pre-tax insurance operating income above $10 billion. But one of the key growth areas for AIG may be slowing down just a bit: mortgage insurance. With the market for both new mortgage origination and refinancing loans significantly down during the first quarter, it's likely AIG will report a slowdown of its primary mortgage insurance operations.
But another area may be able to bolster the company against a huge drop in growth: cyber insurance.
AIG recently announced a new product offering for its cyber insurances clients, which covers the losses stemming from physical damage to property and people. The market for cyber coverage has been slow moving until recently, when a flood of new threats finally pushed companies to take precautions.
AIG's cyber-related operations reported 30% growth during 2013, and there's still plenty of room to run. Experian reports that only 31% of businesses in the U.S. have cyber-threat insurance, with annual premiums estimated at $1.3 billion according to Betterley Risk Consultants.
With experience in the cyber-protection market since 1999, as well as comprehensive coverage thanks to its new offering, AIG is perfectly positioned to take advantage of a market that's finally gaining steam.
2. Current events
It's been a long road for AIG since it began cutting down on non-core operations in 2009. Its final piece for divestment, International Leasing Finance Corp., is set to fly the coop during the second quarter in a deal with AerCap valued around $5 billion.
While investors shouldn't expect to hear anything substantial on the subject, look for AIG to assure analysts and shareholders that the deal is still on, with any available updates on the closing date.
Another update investors may be interested in revolves around CEO Robert Benmosche's announcement that he will be retiring in early 2015. Since companies can be hugely affected by indecisive executive-replacement strategies, investors should keep an ear out for any updates on the megainsurer's progress in finding a suitable successor.
3. Interest rates
It's no secret that insurance companies would be happy to see interest rates rise. In fact, several major players in the industry quantified the impact of the current low-rate environment -- with AIG reporting a $48 million quarterly decline in profits.
With the new regime in the Federal Reserve starting to hint at rising rates in the near future, the topic will likely be back in the spotlight each quarter during earnings season. Some analysts believe the Federal Funds rate could reach 1% by the end of 2015, and 2% the following year.
The anticipated rise in interest rates will be welcomed by AIG and other insurers, who have struggled to find investment strategies that buffered their investment income from interest rate sensitivity. Alternative investments have been helpful to AIG over the past few quarters, with investment income boosted 16.7% during the fourth quarter of 2013 thanks to real estate, hedge fund, and other non-traditional investments.
What investors should look for are any indications of new strategies, plus the effectiveness of current portfolios as interest rates continue to fluctuate. Though AIG experienced a great result from its alternative investments during the final months of 2013, several other insurers reported that the small fluctuations in interest rates caused their similarly designated portfolios to lose money.