AIG (AIG) reported pre-tax operating income of $1.5 billion in 1Q15 for its commercial insurance business, as compared to $1.4 billion in 1Q14. The company expanded its operations primarily due to improved underwriting results from property casualty and mortgage guaranty, partially offset by lower net investment income from property casualty and institutional markets.
AIG reported a 5% increase in pre-tax operating income of property casualty on higher underwriting income. The combined ratio decreased 1.8 points to 97.1 in 1Q15. The loss ratio also decreased 1.3 points to 68.1, primarily due to lower current accident year losses, lower catastrophe losses, and lower net unfavorable prior-year loss reserve development. The net premium written increased by 1% compared to the prior-year quarter, excluding the impact of the 6% increase in foreign exchange net premium written.
The combined ratio is calculated as the total underwriting expenses of a P&C (property and casualty) insurer as a percentage of premiums received. Hence, a combined ratio below 100% implies an underwriting profit, while a ratio above 100% implies a loss.
Growth in the in-force business and cancellations on non-refundable single premium business decreased losses and loss adjustment expenses incurred, which led to a 91% rise in pre-tax operating income of AIG’s mortgage guaranty business. In spite of the increase in acquisition expense, the division reported healthy profits on higher underwriting income and net premiums. New business written during 1Q15 had an average FICO score of 752 and an average loan-to value ratio of 91%.
Institutional markets’ pre-tax operating income decreased to $147 million in 1Q15, mainly due to lower returns on alternative investments compared to the prior-year quarter. The decrease in net investment income was partially offset by higher fee income driven by growth in reserves and assets under management, primarily from the stable value wrap business.
AIG managed to grow book value per share at ~13% during the past one year. Compared to this, per-share book value growth was around 6% for ACE (ACE) and Allstate (ALL), while it was around 8% for Chubb (CB) in this period.
Investors can invest in insurance companies by investing in financial sector ETFs like the the Financial Select Sector SPDR ETF (XLF).