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It looks like AIG is doing something right – besides just staying away from Hank Greenberg's lawsuit over the company's government bailout. The insurer, which is trying to rehabilitate its business and its image, reported a $4-billion loss in the fourth quarter. But not to worry: the loss was caused by a $4.4-billion hit on the sale of International Lease Finance, the aircraft leasing group, as part of the grand plan to focus on the core insurance business. After-tax operating profit plunged 74 per cent to $0.20 a share, but still surpassed Wall Street's expectations. Investors should not get too excited, though. The beat was primarily due not to underwriting acumen, but gains in AIG's investment portfolio. After-tax operating income from its direct investment book, for example, was $509-million in the quarter, versus a loss of $27-million a year ago.
The key to AIG hitting its goal of a 10 per cent return on equity by year-end 2015 (from about 5 per cent now, normalised for the businesses it has been selling, according to Bernstein) is the property and casualty business. Some $2-billion of catastrophe losses from super storm Sandy meant an operating loss there in the last quarter. But the ratio of losses to premiums, excluding catastrophes, is improving. It fell to 63 per cent from 69 per cent and has been on a downward trend, a sign that P&C underwriting margins are improving. For now, that is being offset by higher costs – the operating expense ratio jumped to 17 per cent from 14 per cent. AIG is spending to shift to what it hopes will be more profitable areas.
Shares jumped as much as 6 per cent on the earnings. Even with a 40 per cent gain over the past year, the stock trades at about 60 per cent of book value versus other insurers at or above book. Expenses need to fall eventually, and investments will have to keep boosting margins. AIG must avoid wrong turns, but for now, it is on the right track.