AIG: American International Group reported uncharacteristically sunny results in the second quarter. The troubled US insurer earned $1.8bn – the first time it achieved profitability in nearly two years. Yet the break in the clouds surrounding AIG could be similar to a summer in Glasgow – any reprieve from the otherwise gloomy forecast is likely to be short.
AIG’s profits were driven by the strong rally in credit markets. Realised capital losses, net of tax, were $859m in the quarter. They were more than $4bn in the same period last year. While AIG’s investment book is doing better, it is a stretch to think such good news will be repeated with regularity.
What looks more durable is the tarnish on AIG’s reputation. This makes it difficult for the firm to underwrite new business at attractive prices.
One way to gauge this is to look at the company’s “combined ratio”. This measures the percentage of premiums paid out in claims and expenses. In other words, it’s a gauge of whether an insurer makes money from underwriting. A lower figure is better, because that signifies a higher margin of safety. That matters, because insurance companies almost always get in trouble when they charge too little for the risks they take.
In the current quarter, the combined ratio for AIG’s insurance operations was 98.2%. A year ago, it was 92.2%.The figure for rival Chubb, a firm which recently warned that government-backed firms might be underwriting policies too cheaply, was 86% in the second quarter.
Of course, AIG isn’t exactly the same beast as Chubb. It does more business overseas, for example. But if the company doesn’t increase its underwriting prices, it could be storing up more problems for the future.