1 Thing to Focus On From AIG's Earnings
Nov 5th 2012 1:48PM
Updated Nov 5th 2012 1:56PM
If you're bullish on insurance giant AIG (NYS: AIG) , there's a good chance that your investment thesis goes something like this: AIG did some very stupid things in the past, but it's getting past those mistakes, and it's now a grossly undervalued company with quality insurance operations.
That thesis, of course, hinges in a big way on that last part -- that AIG does, indeed, have insurance operations worth investing in.
For the third quarter, AIG's overall profit topped expectations, and results blew away what the company reported last year. But with so much messiness still showing up in AIG's results, it's hard to take away a whole lot that's meaningful from the overall bottom line.
Getting jiggy with P&C
Drilling down then to something that's more notable, AIG's property and casualty insurance operations managed to report a big bump, with profits climbing to $786 million from $492 million a year ago. The year-over-year gain was mostly attributable to investment performance as investment income, and capital gains were up a combined $300 million from 2011.
Underwriting, meanwhile, improved just slightly, with the quarter's underwriting loss improving from $532 million last year to $441 million this year. The combined ratio -- a measure of an insurer's underwriting profitability -- ticked down 105% from 105.9%. Better, but still not where I'd like to see it.
What's easy to like about these results is that they're much better than last year's. It never hurts to be able to say that profits improved 60% year over year. On the other hand, the "improvement" in underwriting isn't particularly encouraging. While the combined ratio moved in the right direction, it did so largely because of lower catastrophe losses, something that -- apart from business mix -- the company doesn't have much control over. The expense ratio, on the other hand, was up versus last year.
On the latter point, AIG chalked up the increase in spending to changes in business mix and investments in people and direct marketing. Presumably, these are things that will pay off over the longer term for the company in the form of better underwriting results, but we'll obviously have to wait to see if the improvements actually materialize.
The bottom line though, is that although profit line for AIG's P&C operations looks much improved this quarter, when it comes to proving that AIG has solid underlying insurance operations, this segment still has plenty of convincing to do.
Obviously as we look ahead, AIG's fourth-quarter results are going to look a lot different than the third-quarter numbers thanks to Hurricane Sandy. Though CEO Robert Benmosche has assured investors that Sandy won't be a huge issue for the company's financial strength, there's no doubt that the P&C unit will be absorbing considerable losses this quarter.
That said, AIG investors should be less focused on Sandy -- which is an industrywide, as opposed to an AIG-specific, issue -- and keep their eyes on the real prize in the company's P&C operations: long-term improvement of the overall underwriting results.
Of course, if you're looking for an insurer that already gets it right in its underwriting, look no further than Warren Buffett's Berkshire Hathaway (NYS: BRK.A) (NYS: BRK.B) . The Fool's resident Berkshire Hathaway expert Joe Magyer has created this premium research report on the company. Inside, you'll receive ongoing updates as key news hits, as well as reasons to both buy and sell the stock. Claim a copy by clicking here now.
The article 1 Thing to Focus On From AIG's Earnings originally appeared on Fool.com.Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway. The Motley Fool owns shares of American International Group and Berkshire Hathaway and has the following options: long JAN 2014 $25.00 calls on American International Group. Motley Fool newsletter services recommend American International Group and Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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