AIG Earnings: Underwriting Profitability Leveling Out

AIG AIG produced another strong quarter, in our view, and the company continues to advance toward generating an acceptable return on a sustained basis. For the quarter, the adjusted annualized return on equity was 9%, or 10% on a tangible basis. We believed for some time that the company had a path toward acceptable returns, and this quarter suggests AIG is almost there. We will maintain our $65 fair value estimate for the no-moat company and see shares as undervalued.

Like its peers, AIG continues to benefit from a hard pricing market in commercial lines, and net written premiums were up 14% year over year in the North American Commercial segment. Management stated that rates increased 8% in this area. Better pricing continues to lead to strong underwriting profitability with the combined ratio for General Insurance improving to 91.9% from 92.9% last year. However, the underlying combined ratio (which excludes catastrophe losses and reserve development) has been basically flat over the past few quarters. We’ve seen underwriting profitability start to flatten out at commercial line peers as well and don’t expect the hard market to drive significant improvement from here. Still, with underwriting profitability at an attractive spot, the outlook remains quite positive in the near term, and higher interest rates should provide an additional boost to overall profitability over time.

The life insurance business turned in a solid quarter, with an annualized adjusted ROE of 11% in the quarter. Management still intends to fully separate the Corebridge business but held off on a secondary offering in the first quarter because of market volatility. Management’s comments suggest it is ready to complete a secondary offering once conditions are favorable. We would prefer to see this process completed as quickly as possible but appreciate the difficulties current capital market conditions represent.