Analysts John M. Nadel, Dan Farrell, and Nitin Chhabra take a close look at AIG’s 4Q13 results, delving into the numbers and looking at evidence for both the bull and bear thesis.
American International Group Inc (NYSE:AIG)’s 4Q13 results provided fuel for both bulls and bears. Bulls can point to the outlook for stronger subsidiary dividends in 2014, the new buyback authorization, and increased common dividend. Bears can point to yet another delay in expense saves, a declining pace of P&C pricing and a somewhat disappointing pace of buybacks in the back half of 2013. The net impact of our modeling refinements is reductions in our 2014E/15E EPS of about 6% and 4%, respectively.
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AIG Reducing 2014/15E EPS
The most notable impact to our estimates was management commentary that the P&C expense ratio would be flat in 2014. That change vs. our prior assumption reduced our 2014E EPS by $0.25 to $3.75. Our 2015E EPS goes to $4.40 from $4.60. Other modeling adjustments netted to no impact. The positives included some incremental P&C loss ratio improvement and modestly higher earnings from Life & Retirement offset by higher Corporate expense levels (American International Group Inc (NYSE:AIG) guided to $225-250m quarterly) and a higher tax rate (AIG guided to 31-32% vs. our prior 30% assumption). Our buyback assumptions remain $3.5b/$4.0b in 2014/15, respectively.
New versus old
Comparing a few key 2014 assumptions in our new estimates vs. our prior estimates:
• AY LR ex. Cats – new 61.4% vs. old 61.6% and 63.0% in 2013
• Commercial AY LR ex. Cats – new 61.8% vs. old 62.4% and 65.5% in 2013 (assumes normalization of severe losses plus roughly 2.5pts of improvement from pricing/mix shift).
• Consumer AY LR ex. Cats – new 58.8% vs. old 58.4% and 59.6% in 2013 (a bit higher assuming likely weak 1Q14 driven by weather, elevated travel & accident losses, and improving but still elevated warranty losses).
• P&C Operating Expense Ratio – new 14.9% vs. old 13.4% and 14.9% in 2013
• P&C Acquisition Ratio – new 19.5% vs. old 19.8% and 19.7% in 2013
• Total P&C Catastrophe Losses – new 4.2pts vs. old 4.0pts and 2.3pts in 2013 (continued growth in property insurance should lead to higher “normal” level of catastrophe losses)
Reducing price target
Based on our updated estimates and peer group multiples, we are reducing our price target from prior $59 to new $56. Our updated SOTP applies a 10.6x P/E multiple to 2015E operating income from the insurance operations plus $4 for DIB/GCM plus $8 for the NPV of tax loss carryforwards plus a little over $4 for the proceeds from the sale of ILFC, including American International Group Inc (NYSE:AIG)’s pro forma stake in AerCap (AER, $39.26, Not Rated).