AIG Earnings: It’s Been a Long Road, but AIG Is Generating Acceptable Returns

We’ve long believed that under capable management, AIG AIG would be able to generate acceptable returns given time. The company now appears to be validating that belief with a tangible adjusted annualized return on equity of 10% in the quarter, and both sides of the business contributing roughly equally to that return. While it will take more than one quarter to confirm that the company is no longer destroying value, we believe AIG can hold this ROE level. We will maintain our $66 fair value estimate for the no-moat company and see shares as slightly undervalued.

AIG continues to benefit from a hard pricing market in commercial property-casualty lines. The underlying combined ratio for P&C operations in the quarter came in at 88.0%, which is the best level the company has seen since 2007. It also represents a modest improvement from the 88.5% level last year. The underlying combined ratio had been basically static sequentially over the past few quarters, echoing the flattening pattern we’ve been seeing at peers. This quarter marks a slight positive break with the previous level. However, at this point, this just looks like some positive volatility. As we move deeper into the hard market, we are not expecting any significant improvement in underwriting margins at AIG or peers.

The life insurance segment turned in a solid quarter, with an adjusted annualized ROE of 12%, which was a modest sequential improvement. Management continues to work toward fully separating life operations, and the secondary IPO in the quarter reduced AIG’s ownership of Corebridge Financial to 65%. We would prefer that AIG completes this process as quickly as possible, as we see no strategic benefit to combining the two sides of the business, and we believe that fully divesting the life insurance operations will give investors a clearer look at the improvements taking place on the P&C side.