American International Group

Overall, AIG's second-quarter results showed a bit of a stall on its path toward better returns, but results were well within the level of quarterly variation we've come to expect.

Why it matters: Annualized adjusted return on equity came in at 11%, down slightly from the 12% level in the last two quarters, but well within the company's medium-term target of 10%-13%. The underlying combined ratio for the AIG's P&C operations held basically level with recent results, coming in at 88.1%, compared with 88.4% last year. The steady trend in underwriting margins largely tracks with what we are seeing from peers, but we question how long insurers will be able to maintain underwriting margins at these levels given weaker pricing trends. The company's expense ratio ticked up sequentially to 30.8% from 29.3%. However, we think management's target of an expense ratio below 30% by the end of 2007 still looks realistic, and better efficiency might be necessary to generate any improvement in underwriting margins going forward.

The bottom line: We will maintain our $80 per share fair value estimate for the no-moat company and see the shares as about fairly valued. Net written premiums grew 9% year over year, with this growth relatively evenly spread across the company's segments. The strong growth in the second quarter suggests growing confidence on the part of management that the company has achieved a stable base of sufficiently profitable business. We see most P&C insurers as materially overvalued right now, as we think the market is extrapolating recent top-of-the-cycle returns out too far into the future. AIG looks like a relative bargain in this respect, but we caution that it may be increasingly difficult for management to improve returns if industry conditions start to normalize.

In May 2026, AIG sold its remaining interest in Corebridge for $710 million. The complete divestiture of its life insurance operations has been a multiyear process, but we are pleased that it has now been finished. The Corebridge stake has not been a material consideration for some time, in our view, but a complete separation finally brings the situation to a close. We think a focus on P&C operations is the best long-term strategic course for the company.

Our fair value estimate is $80 per share, which equates to a price/book multiple of 1.1 times based on the 2025 year-end book. Excluding goodwill, our valuation is equivalent to 1.2 times the book value.

We project premiums for property and casualty operations to grow at a 3% compound annual rate during the next five years. While management has started to pivot toward growth as underwriting profitability has improved, we think AIG's size as well as the maturity of the industry will limit long-term organic growth opportunities. Additionally, we believe a weaker pricing market will be a headwind to growth.

AIG has made significant strides in improving underwriting profitability within its P&C operations and is currently benefiting from strong market conditions in commercial lines. We expect the combined ratio to start to creep up over time, as market conditions normalize and higher interest rates reduce the need for underwriting income. Over the full projection period, we expect the combined ratio in P&C operations to average 95%, compared with an average of 92% over the past five years. Our assumptions assume one large catastrophe loss year to account for the volatility inherent in the industry.

AIG took a step back in terms of profitability in 2020 due to the impact of covid-19 on claims and capital market conditions. However, profitability rebounded in 2021, and we expect returns on equity to improve to a level consistent with our cost of equity assumption in future. We project adjusted ROE over the next five years to average 9%.

We use a cost of equity of 8.9%.

In general, insurers do not benefit from favorable competitive positions. Industry competition is fierce, and the products are essentially commodities. Furthermore, most participants do not know their cost of goods sold for a number of years, allowing them to underprice policies without knowing it. Firms have a significant incentive to chase growth without regard for profitability, a cycle that repeats itself as competitors are forced to match artificially low prices or risk losing business.

We do not believe AIG has a moat, and while we see considerable scope for improvement in the company's results over time, we think it would be difficult for AIG to develop a moat in its current form. The company does have some areas of strength: It is among the largest commercial P&C underwriters, which means that it should be able to leverage its proprietary database to better price and select risks than smaller peers, and recent investments in technology should allow it to better exploit this potential advantage. AIG also has one of the widest geographic reaches, which gives it an advantage in garnering business from global firms. Finally, the company has trimmed its offerings in recent years through some divestitures and beefed up its presence in specialty lines, which we think generally are more attractive from a moat perspective.

But AIG participates in almost every major insurance line, across every distribution channel, and in a number of geographies. As such, we believe that any advantage the company might hold in particular areas is likely to be diluted elsewhere. We think AIG's diversification will make it difficult to consistently beat industry returns in the long term. We believe fully divesting its life insurance operations put the company in a more favorable position, but do not believe this alone will lead to a moat for the remaining P&C operations.

The aftermath of AIG's issues during the financial crisis occupied management's attention for quite some time. With these issues now resolved, there could be ample scope for improvement.

AIG has demonstrated significant progress in improving underwriting margins in its P&C business.

The current focus on risk-adjusted returns sets a proper course for the company, and just increasing profitability to the level of its peers would represent a material improvement.

AIG has a history of under-reserving for claims, making it difficult to trust that current reserves are adequate.

AIG has yet to prove that its existing franchise can consistently earn adequate returns.

As a diversified player in an industry that is not particularly moaty, AIG will always be dealing with issues in some part of its business.