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AIG’s Consumer Insurance Benefits from Hedge Funds, Underwriting

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Consumer Insurance division

American International Group’s (AIG) Consumer Insurance division recorded a rise in pretax operating earnings in 3Q16. The division’s pretax operating income rose to ~$1.4 billion compared with ~$657 million in 3Q15. The rise was primarily due to strong Retirement and Personal Insurance sales.

AIG is working on expanding margins through expense management. Insurance giants such as Allstate (ALL), MetLife (MET), and the Hartford Financial Services Group (HIG) are spending resources on reducing their operating expenses to boost profitability.

Investors can gain exposure in the insurance sector through financial sector ETFs such as the Vanguard Dividend Appreciation ETF (VIG) and the Financial Select Sector SPDR ETF (XLF).

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Retirement division

AIG’s Retirement Insurance division posted pretax operating earnings of $1.1 billion in 3Q16, a rise of 74%. The rise was primarily due to higher net investment income on alternative investments, as well as higher net positive adjustments from an update of actuarial assumptions that resulted in a pretax gain of $322 million.

Premiums and deposits fell to $5.2 billion, primarily due to a decline in variable annuities and lower sales in retirement and fixed income categories.

Life Insurance division

AIG’s Life Insurance division posted pretax operating income of $98 million compared with an operating loss of $40 million in 3Q15. This rise was mainly due to a lower net negative adjustment from a review of actuarial and higher net investment income from hedge funds. International Life and Health resulted in a rise of premiums and deposits.

Personal Insurance division

AIG’s Personal Insurance division posted pretax operating income of $178 million in 3Q16 compared with pretax operating income of $62 million in 3Q15. The rise was primarily due to improved underwriting results. The combined ratio declined mainly due to an improvement in the expense ratio.

The higher loss ratio reflected more accident year losses and lower favorable reserve development, partially offset by low catastrophic losses. In the next part, we’ll study AIG’s Commercial Insurance segment.

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