Back to top

Analyst Blog

Standard & Poor’s Ratings Services (S&P) has upgraded the financial strength of American International Group Inc.’s (AIG - Analyst Report) property & casualty (P&C) segment, formerly known as Chartis Group. The elevation acknowledges the segment’s improved operating leverage.

Accordingly, S&P has lifted the long-term counterparty credit rating and financial-strength rating (FSR) of AIG P&C from “A” to “A+”, which is the 5th highest position on the rating table. This marks the first upgrade since 2008. Additionally, the ratings agency affirmed its “A+” rating on AIG life and retirement services’ segment. AIG’s senior debt remains pegged at “A-”. All the ratings carry a stable outlook.

AIG has come a long way post its financial crisis, according to S&P. The full repayment of the government bailout loan has injected financial flexibility into the company and helped management concentrate completely on generating higher operating leverage. Meanwhile, asset disposals in the last few years have left AIG with a focused core-business portfolio, thereby strengthening its competitive leverage.

Core operations’ growth on track

AIG’s life insurance and retirement service operations have been improving on account of stability in surrender activity along with recoupment of higher investment returns, aided by improved base yields due to the recovery in the financial market over the past couple of years. Although the low rate environment limits the desired upside, this segment has the potential to generate higher earnings.The segment’s pre-tax earnings escalated about 82% year over year to $1.57 billion in the first quarter of 2013, while it rose 28% to $3.78 billion in 2012 from $2.96 billion in 2011.

Further, the ratings agency remains confident of AIG’s P&C business based on its strong brand name, underwriting capability and global expansion of a multilateral product portfolio. The company repositioned its P&C portfolio to strengthen its underwriting capacities, whereas the ongoing restructuring and re-pricing initiatives will likely drive earnings growth in the near future. The pre-tax income further surged about 76% year over year to $1.6 billion in the first quarter of 2013, generating $231 million in underwriting income against a loss of $180 million in the year-ago quarter along with an improved combined ratio.

Concurrently, AIG continues to reduce debt and non-core operations, as reflected by the recent bond repurchase and the scheduled sale of its aircraft-leasing unit – International Lease Finance Corp. (ILFC), to a Chinese consortium by mid-2013. This will further improve the company’s financial leverage.

While anyrobust growth compared with the peer group appears overly ambitious at present, we believe a positive turnaround in the global economy and an improved macro scenario is likely to pave the way for significant growth of AIG. Currently, the company carries a Zacks Rank #2 (Buy).

Meanwhile, other outperformers of the insurance industry include Amerisafe Inc. (AMSF - Analyst Report), Employers Holdings Inc. (EIG - Snapshot Report) and Hilltop Holdings Inc. (HTH - Analyst Report), all of which carry a Zacks Rank #1 (Strong Buy).

Please login to Zacks.com or register to post a comment.