Company Reports

Higher interest rates have boosted investment income and have had a material positive impact on overall returns for our domestic property-casualty insurance coverage. While insurers with low fixed-income duration have seen the largest impact, the effect has flowed through our coverage. Interest rates and investment income are only part of the story for insurers, but the outlook for underwriting is strong as well, in our view. Following a few years of solid price increases, commercial insurers have seen underwriting margins stabilize at an attractive level. Personal auto insurers have endured some difficulties recently, but strong pricing increases have improved combined ratios. With both sides of the profit picture already strong or improving, we expect our P&C insurers to generate unusually attractive results in the near term. However, we believe the market has overreacted to these tailwinds, and we see our coverage as generally overvalued. Investigating historical underwriting results for a P&C insurance peer group strongly suggests that underwriting results adjust over time to changes in interest rates, and underwriting margins have improved over the past few decades as interest rates fell. If interest rates stay high, we expect underwriting margins will compress, and returns will normalize. Our fair value estimates hinge on the idea that returns for our coverage will ultimately return to a level roughly in line with historical averages. If the industry does mean-revert over the next few years, investors will pay an overly rich price today for most of our coverage.

American International Group announced that it has reached an agreement to sell a 20% stake in Corebridge, its life insurance operations, to Nippon Life. The aggregate price will be $3.8 billion, in line with the current market price for Corebridge’s shares. AIG had previously said that it expected to reduce its ownership to a point where it could deconsolidate the life segment in 2024, but this transaction is not expected to close until the first quarter of 2025, so possibly further share sales will be completed this year. Including this sale, AIG would hold a little over a 30% stake in Corebridge. We would like to see AIG deconsolidate Corebridge as quickly as possible in order to simplify the company’s reporting and increase transparency. While we are encouraged by the sale, one of the terms of the deal is that AIG will maintain a 9.9% stake in Corebridge for at least two years. We would like to see AIG fully divest from Corebridge and see this commitment as a negative. We will maintain our $72 fair value estimate for the no-moat company and see the shares as modestly overvalued.

AIG’s first-quarter results were solid, in our view. The annualized adjusted tangible return on equity in the quarter was 10%, in line with the previous quarter, and, in our view, providing further support for the idea that AIG has reached a point where it is generating acceptable overall returns. We will maintain our $72 fair value estimate for the no-moat company and see shares as about fairly valued at the moment.

The years since the financial crisis have shown that American International Group would have destroyed substantial value even if it had never written a single credit default swap, had noncore businesses it needed to shed, and had material issues in its core operations that it needed to fix. We've been encouraged, however, by the recent progress in terms of improving underwriting margins, and management's efforts to reduce costs have been another material step.

AIG delivered a solid finish to the year. Adjusted tangible return on equity was 10% for both the fourth quarter and the full year, suggesting AIG has now reached a point where the company is generating acceptable returns. We remain encouraged by the improvement in property and casualty, or P&C, underwriting results, which we see as the most critical factor in maintaining acceptable returns over time. We will maintain our $68 per share fair value estimate for the no-moat company and see the shares as fairly valued at the moment.

P&C insurers have had substantial pricing increases across lines recently, but otherwise, commercial and personal insurers are in very different places. For commercial insurers, an extended period of strong price increases has them in a hard market and realizing attractive underwriting margins. Underlying combined ratios have flattened out recently, and we don't expect any significant improvement. Still, this should leave commercial insurers in a strong position over the next couple of years. Personal auto insurers have endured a difficult period in the wake of the pandemic, due to a variety of negative claims trends, and have been pushing pricing to catch up. While they are not out of trouble yet, we think the third quarter could mark the start of a turn toward more normalized underwriting results.

The years since the financial crisis have shown that American International Group would have destroyed substantial value even if it had never written a single credit default swap, had noncore businesses it needed to shed, and had material issues in its core operations that it needed to fix. We've been encouraged, however, by the recent progress in terms of improving underwriting margins, and the plan to take out $1 billion in costs has been another material step.

AIG delivered a solid third quarter, in our view, with the adjusted annualized return on equity of 8.5% showing the company remains on the doorstep of adequate returns. We are encouraged by the continued progress in improving P&C underwriting results, as we see this as the critical factor in improving returns over time. We will maintain our $66 fair value estimate for the no-moat company and see shares as fairly valued.

We’ve long believed that under capable management, 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.

RenaissanceRe announced it will acquire American International Group's treaty reinsurance operations, which include Validus Re, AlphaCat Managers, and a portion of Talbot. The purchase price is $2.99 billion, which equates to 1.4 times book value. We like this deal strategically for American International Group. In our view, reinsurance is a very difficult area to develop a moat, and also an area that typically adds volatility to underwriting results. While we don’t believe American International Group’s P&C business currently benefits from a moat, shedding less attractive areas pushes the company in the right direction, in our view. Further, we see the purchase price as reasonable. However, the deal is too small to have a material impact on our $66 fair value estimate, which we will maintain.

The years since the financial crisis have shown that American International Group would have destroyed substantial value even if it had never written a single credit default swap, had noncore businesses it needed to shed, and had material issues in its core operations that it needed to fix. We've been encouraged, however, by the recent progress in terms of improving underwriting margins, and the plan to take out $1 billion in costs has been another material step. In 2020, the impact of the coronavirus obscured the company's progress, but we think results since have been encouraging.

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.

While reported results were weighed down by investment losses, we think American International Group, or AIG, largely maintained its course on an underlying basis in the fourth quarter. An adjusted ROE 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.

American International Group announced that it has terminated interim CFO Mark Lyons after discovering that he had violated his confidentiality and nondisclosure agreements. The company said that the violations were not related to its financial statements or reporting, and that it and Lyons have reached a settlement agreement over the matter. Sabra Purtill will take over as interim CFO. While this situation doesn’t reflect well on management, we don’t believe it materially affects AIG from a long-term perspective, and we will maintain our $65 fair value estimate for the no-moat company.

The years since the financial crisis have shown that American International Group would have destroyed substantial value even if it had never written a single credit default swap, had noncore businesses it needed to shed, and had material issues in its core operations that it needed to fix. We've been encouraged, however, by the recent progress in terms of improving underwriting margins, and the plan to take out $1 billion in costs has been another material step. In 2020, the impact of the coronavirus has obscured the company's progress, but we think results since have been encouraging.

American International Group's third-quarter results were affected by catastrophe losses and capital market movements, but the company's underlying trajectory is largely the same, as the insurer continues to make strides to improve its underwriting results. While AIG's adjusted annualized return on equity of 4% was not impressive, it was also not unexpected, given the impact that catastrophes typically have on third-quarter results. We will maintain our $65 fair value estimate and no-moat rating. We see the shares as modestly undervalued and believe that the market has been slow to appreciate the improvements management has made.

Given the differing states of the pricing cycle across lines and recent capital market movements, property and casualty insurers have a variety of tailwinds and headwinds at the moment. Commercial line insurers have seen strong pricing increases over the past few years, and we think the outlook for that area is relatively bright, as attractive underlying combined ratios create a solid base for strong profitability. Conversely, following a burst of abnormally high profitability in the early stage of the pandemic, personal auto insurers have struggled with a number of headwinds more recently, which has pushed most players into significant underwriting losses. Higher interest rates have reduced carrying value for fixed-income investments but offer the possibility of better investment income going forward. Finally, the bear market creates issues for insurers with an equity-heavy investment approach.

American International Group, or AIG, announced that it will launch the initial IPO of its life insurance operations, which will be dubbed Corebridge Financial. The company will offer shares equivalent to a 12% stake in the business at a range of $21 to $24 per share. That price reflects a discount to adjusted book value and is lower than the value AIG received when it sold a 10% stake to Blackstone in 2021. However, we think this simply reflects weaker capital market conditions this year, and we are pleased to see the company accept the situation and begin this process. We don’t believe a separation will necessarily unlock material shareholder value, but we do believe that allowing management to completely focus on the turnaround in the P&C business would be a positive. Further, we see no material strategic benefit from combining P&C and life operations, and eliminating any noise from the life side of the business will provide a clearer look at the improvement AIG is seeing on the P&C side. We will maintain our $65 fair value estimate and no-moat rating.

American International Group showed ongoing improvement in terms of property and casualty underwriting results, but capital market conditions were a drag on investment income and life insurance results. The net effect was an annualized adjusted return on equity of 7% in the quarter. While the ROE wasn’t impressive, we see fixing P&C underwriting as the key long-term issue for AIG and therefore view the results this quarter as a positive. We will maintain our $65 fair value estimate and no-moat rating.

AIG’s first-quarter results showed that the company continues to make progress in improving underwriting results in the P&C business. However, the annualized adjusted ROE for the quarter was 8%, a modest decline from last quarter, due to lower investment income and weaker life insurance results. We will maintain our $65 per share fair value estimate and no-moat rating.