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AIG Q3 earnings: No bad news is good news

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We’ve often heard investing likened to riding a rollercoaster. Both share ups and downs, unexpected turns, blistering speeds and a decent number of wipeouts. Insurance investors can expect to get whiplashed by unsuccessful mergers, business lines developing unfavorably and sudden natural catastrophes, among other things.

But AIG has been a rollercoaster like no other. The frequency (and magnitude) of the company’s surprises have left investors asking whether it is over and finding out there is one more loop in this ride.

But after several years of working to fix the book, which included massive limit compression, withdrawing from volatile classes, moving up programs, pushing above market rate rises the third quarter of 2021 finally feels like the cool-down brake run at the end of the ride.

AIG reported Q3 operating EPS of $0.97/share, slightly above street expectations of $0.88.

In general insurance, the company reported an accident-year combined ratio of 90.5% and updated the guidance for a sub-90% target ratio for full year 2022 (previously set for end of 2022). Management also optimistically pointed to further improvement after hitting that benchmark.

Commercial lines benefitted from strong pricing momentum, improved retention, and new business production, while personal lines saw revived growth as travel insurance picked up again.

Pre-tax income for the life and retirement segment was down 13% YoY, in part due to the annual actuarial study.

With the stock up 83% over the past year, investors appear willing to forgive and forget. We aren’t quite ready to pop the champagne yet.

While profitable growth has been on the horizon for a few quarters, it is becoming easier to believe that the insurance segment is producing a significant underwriting profit.

In recent years, the General Insurance segment has represented less than a third of earnings, with investment results making up for underwriting losses. However, over the past 12 months, the segment has provided 48% of earnings, up from 35% in 2020.

Note, a similar trend was seen in 2019, but the couple of quarters of underwriting profits were quickly overturned (obviously Covid was a curveball).

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So while we congratulate AIG for strong results this quarter, we would hold our breath for a couple more quarters before celebrating.

Firstly, the favorable commercial environment aided this quarter’s growth.  

The chart below shows AIG posted another quarter of double-digit growth, consistent with other commercial carriers, as its pivot to growth from remediation hit its fourth quarter.

The company noted another quarter of rate-on-rate, with global commercial rate increases of 12% in Q3 vs. 13% in Q2, with some lines getting rate increases for the third year in a row. Excess casualty led the increases, with 15% (vs. 20% in Q2).

We remain cautious of this growth in the commercial lines space since it still remains to be seen what will be the normalized level of loss-cost and inflation once the broader economy and the court system reopens.

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Secondly, AIG’s commercial loss ratio continues to be elevated compared to peers.

Rate in excess of trend has been the theme this quarter, with commercial carriers seeing improvements in the underlying loss ratio.

The chart below shows that AIG’s North America commercial lines underlying loss ratio is still higher than the commercial peer group.

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Thirdly, the firm’s reserve development appears to have stabilized.

Since the company-wide restructuring in 2017, the firm has experienced bouts of prior period development in its general insurance line, most notably in the third quarter of 2017, when the company had to strengthen 2016 reserves by more than $830mn, or 12.7%. The fourth quarter of 2018 also saw substantial accident reserve development, more than $360mn, or 5.3%.

But the days of painfully large reserve developments seem to be in the rearview mirror. The chart below shows that this quarter, AIG reported a favorable loss reserve development of $50mn, or 0.5%, for the third quarter in a row of favorable development.

Three quarters is hardly a trend. As recently as the third quarter of 2020 the firm snapped a three-quarter streak of favorable loss development and had to strengthen reserves through the second half of 2020. Therefore, we hesitate to blow the trumpets and proclaim that the firm’s reserve development issues over just yet.

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With this quarter’s earnings, the AIG rollercoaster seems to have transformed itself into a calmer ride, but it remains to be seen if the positive quarterly performance will translate into longer term trends.

An earlier version of this story misstated the company’s EPS, updated guidance and growth commentary.

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