AIG Finishes the Year on a Solid Note

While reported results were weighed down by investment losses, we think American International Group AIG largely maintained its course on an underlying basis in the fourth quarter. An adjusted return on equity of 7% for the full year shows that there is still some work to do to get the no-moat company to an acceptable return, but we see it playing from a position of increasing strength going forward. We will maintain our $65 fair value estimate.

In the property and casualty business, AIG continues to benefit from stronger underwriting performance. The underlying combined ratio in the quarter improved to 88.4% from 89.8% last year. However, sequentially the underlying combined ratio was flat. We’ve seen underwriting margins at peers level off in recent quarters as pricing increases have ebbed and claims inflation has worked into results. AIG appears to be following this industry trend, and with its underwriting margins converging with peers over the past couple of years, there could be limited scope for further improvement. However, underwriting margins in the quarter were negatively impacted by a 160-basis-point sequential increase in the expense ratio. AIG’s underwriting improvement has been increasingly driven by a lower expense ratio in recent quarters, and this could be a temporary blip, opening up potential improvement if it reverses. Management expects to generate an additional $300 million in annual cost reductions through its AIG 200 program, with most of that realized in 2023.

Like its peers, AIG’s reported book value has been under pressure this year as higher interest rates lowered the carrying value of its fixed-income portfolio. AIG appears to have turned a corner on this front in the quarter, with book value increasing modestly sequentially. However, given that insurers typically buy fixed-income investments and hold to maturity, we think investors should generally ignore these shifts in market value.