AIG Struggles to Grow Core Business Amid High Impairment Charges
AIG (NYSE:AIG) posted a loss of more than $4 billion in the third quarter as it took impairment charges on its aircraft fleet and its stake in Asian life insurer AIA. [1] AIG’s results reflect weak performance across all of its operating segments as a result of the unfavorable macroeconomic environment and natural disasters. Volatile equity markets, widening credit spreads, reduced interest rates, Hurricane Irene and Tropical Storm Lee are some of the major factors that contributed to AIG’s poor results in the third quarter. Q3 2011 has been a particularly bad quarter for insurance companies such as MetLife (NYSE:MET), Hartford Financial (NYSE:HIG) and Prudential Financial (NYSE:PRU) most of whom have witnessed significant declines in profits.
We have updated our price estimate for AIG’s stock, which now stands at about $20, approximately 20% below the current market price. Our new price estimate reflects the increased pressure on margins and slower than anticipated growth in AIG’s core insurance business.
See our full analysis of AIG here
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Margins under pressure
The Property & Casualty insurance industry as a whole is facing heavy pressure on operating margins as this year’s natural disasters have more claims and high insured losses. Income from investments generally helps insurers offset these losses but the current low interest rate environment kept investment returns relatively low in the quarter. Competitor Hartford Financial also witnessed eroding margins in the third quarter (see Margin Pressure Weighs on Hartford Financial, $19 Revised Value)
The only point helping AIG’s case is that the company is implementing a rate increase of about 8% in property insurance and about 4% in U.S. commercial insurance. As long as this doesn’t drive customers away, which we do not expect as most competitors are also raising rates, would ease some of the pressure and help increase written premiums.
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Notes:- AIG Reports Third Quarter 2011 Net Loss of $4.1 Billion, Company Press Release, Nov 2011 [↩]