American International Group, Inc.

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 4/5

American International Group, Inc. (AIG) is a global insurance organization, providing a wide range of property and casualty insurance, retirement solutions, and other financial services, primarily for businesses and individuals.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

AIG is a global insurance company that provides insurance solutions that help businesses and individuals protect their assets, manage risks, and provide for retirement security.

Business Overview

AIG operates through three main segments:

General Insurance: Provides commercial and personal insurance products, including property, liability, and accident & health insurance. It operates in various regions including North America, Latin America, Europe, and Asia-Pacific.
Life and Retirement: Offers a broad portfolio of products, including fixed index and variable annuities, along with life insurance, designed to help people with their retirement goals.
Other Operations: Encompasses all other AIG businesses and activities that are not part of general insurance or life and retirement.

AIG is a global company with a major portion of its business coming from North America. However, it has a diversified presence in other continents as well, including Latin America, Europe, Asia Pacific, and the Caribbean.

Competitive Landscape

AIG faces intense competition from a wide variety of domestic and international insurers. The insurance industry is characterized by strong competition, including competition for pricing power and the need to provide the best customer experience.

General Insurance: Competitors include major global commercial and personal insurers such as Allianz, AXA, Chubb, Travelers, and Zurich. These firms compete on a wide range of factors including price, coverage, and service.

The insurance business is highly competitive and volatile.

Life and Retirement: Competition comes from major insurance companies and asset managers offering retirement products, like Prudential, MetLife, Lincoln National, and Voya.

Financial Analysis

AIG’s latest quarterly report for September 2024 reveals a company undergoing a significant transformation as they are winding down operations for the legacy assets. AIG reported a net loss of $649 million, but the adjusted pre-tax income was $2.2 billion reflecting several positive factors such as strong growth in commercial insurance, strong investment income, and improved expense efficiency.

Revenue Distribution

General Insurance: A major portion of AIG’s revenues, the segment delivered a net premium income of $8.1 billion, a 15% growth year-over-year on a constant-currency basis, with strong growth in several areas.
Life and Retirement: These businesses contributed to profitability while being wound down, as part of the business strategy for separation of the main business.
Other Operations: Includes income from legacy assets, run-off businesses, and other smaller financial operations that are no longer core to AIG’s operations. The segment continues to have an overall negative impact on income, but they are a diminishing concern.

The current company focuses on General Insurance and life retirement business, however, life retirement is being spun off

Key Financial Metrics

Net Premiums Written: Net premiums written at $10.2 billion, a 13% increase year-over-year and a 11% growth in constant currency
General Insurance Adjusted Pre-Tax Income: $2.2 billion, compared with a loss in Q3 2022
Investment Income: Higher investment income led to an additional $736 million in adjusted pre-tax income, and it was the single biggest factor in profits this quarter.
Combined Ratio: Improved in the General insurance segment and is at 92.5 %, reflecting better underwriting.
Share Repurchases: The company bought shares for $500 million to support shareholder value and has plans for further buybacks

AIG shows significant improvement in operating margins, however, they still face some negative performance from the old businesses they are winding down.

Moat Analysis: 2 / 5

AIG’s economic moat is narrow, but with aspects that could support future performance:

Brand Recognition: AIG has a globally recognized brand, but brand recognition alone isn’t sufficient to create a strong moat, and may not be relevant in all sub-markets for insurance, given its reliance on intermediaries such as brokers.
Scale: AIG operates on a large scale, especially in certain areas of its operations. The size of AIG’s business may present limited barriers to entry for new firms, however, many smaller firms in the industry are doing very well by competing on price and providing similar services.
Regulatory Moats: The insurance industry is generally heavily regulated, this means there’s a regulatory advantage as the company had to go through intense approvals processes to get where it is.

AIG’s current moat isn’t as strong and the company faces major competition in the industry, given that competitors are already established and are able to operate with good results despite the fact that AIG is so big.

Risks to AIG’s Moat & Business Resilience

AIG faces several risks that could hinder its moat and performance:

Industry Cyclicality: The insurance industry is cyclical and AIG may encounter difficulties in periods of downturn. Furthermore, the high degree of competition in the industry may lead to erosion of the moat if companies fight for clients on price alone.
Investment Risks: AIG generates significant earnings from its investment portfolio, which is vulnerable to interest rates, market conditions, and credit quality of securities.
Regulatory Risks: As a global company, AIG faces extensive regulatory risks, this can create new requirements that they would have to navigate, causing additional expenses and management attention.
Operational Risks: There are several operational risks for the company, which may result in losses and can damage the value of the company. These include losses arising from mismanaged risk, the complexity of the business operations, and risks from cyber attacks.
Competition: AIG faces intense competition from several other global insurance providers, including traditional insurers, new digital insurance companies, and fintech firms. The company would need to continue to innovate and adapt to changes in the insurance market to be able to stave off competition.

AIG’s ability to navigate market downturns and its ability to diversify operations will be crucial in determining the business resilience.

Understandability: 4 / 5

AIG’s business, while fundamentally straightforward as an insurance business, is complex in practice, given its global scale, diverse insurance products, various investment strategies, complex financial statements, and several different risks. An average person will struggle to understand its operations fully and its long-term strategy. There are some moving parts because of the transition, but in general, understanding the main business is relatively easy.

Balance Sheet Health: 4 / 5

AIG’s balance sheet appears to be relatively healthy, but with aspects that should be closely monitored. The company has continued its transition, winding down operations of unprofitable sectors and focusing on profitable core operations. Debt and leverage are still areas of concern, even though they have been reduced by the new business structure.

AIG’s has a good cash position and a plan to continue buying back shares, however, there are some operational and capital allocation risks. The company has also focused on improving underwriting and efficiency, all while deleveraging the company.

Justifications:

Debt-to-Capital Ratio: While the debt-to-equity ratio is improving and is becoming better, debt is still a significant part of their total capitalization.
Cash & Liquidity: The company has a good cash position and significant liquidity. The company is managing its operating expenses efficiently, so there is reason to expect strong future cash flows.
Investments: The company has a vast investment portfolio that generates a strong stream of investment income, but those assets also carry significant market risks, that are always impossible to predict.

Recent Concerns/Controversies & Management Response

Restructuring Charges: AIG has gone through significant restructuring changes. These charges are one-time and non-recurring in nature and do not reflect on the core business of the company. However, they do create some volatility and risk and are important to analyse for financial statements. The company has worked to minimise their impact.
Interest Rate Sensitivity: A rise in the interest rates significantly improves the company’s interest income from bonds, which has been the largest factor in improving adjusted pre-tax income. A decline in interest rates may reduce the company’s profitability. The company is working to manage and hedge this risk and is focusing more on fixed rate long-term instruments.
Uncertainty of the Transition: The company continues to have its Life and Retirement business under transition. The company is working on spinning off its legacy assets and moving them to a new structure, and there is some uncertainly about the results of this transaction.
Economic Downturn: With the threat of a recession, it is uncertain whether the company can retain high earnings and sales. The company has said that they believe they have good diversification and will be able to navigate through a recession and a downturn in the economy.

AIG has acknowledged the challenges they are facing and the management continues to make changes to improve performance and profitability of the company.

Conclusion

AIG is a complex global insurance firm undergoing a lot of changes. The company’s restructuring plan is ongoing with an emphasis on profitable core operations, while they face multiple risks from external sources. Although AIG has a wide global brand recognition, its competitive advantage is quite narrow because of the competition and volatility within the industry. There are several uncertainties regarding the current operations and the company must focus on increasing profits and cutting costs. The company’s latest earnings call has shown much progress on all those issues. The company still has some issues to overcome from old legacy operations, but their continued efforts towards improvement in their core operations are commendable, and their balance sheet is quite healthy. Overall, the company is quite understandable, although they have a long and complex history.