Going separate ways can make people wonder what could have been. But maybe it’s even better.
Last year, the insurance giant
and it aims to take that company public in the second quarter as Corebridge Financial. The first move came as life insurers faced low interest rates and grappled with an evolving pandemic. Now with rates set to rise sharply and Covid-19 mortality risks at least better understoodinvestors may wonder why it makes sense for AIG to move forward with the separation process.
Corebridge derives around 55% of its earnings from interest-rate-sensitive spread income, according to a recent note from Autonomous Research analyst Erik Bass, making it relatively rate-sensitive among its peers. life insurance. In fact, the majority of AIG’s higher rate sensitivity in investment dollars comes from the life business, according to figures given by the company on Wednesday’s analyst call. A parallel one-percentage-point rise in the yield curve would yield $300 million of additional one-year adjusted net investment income in life and pensions, and $200 million in P&C. Corebridge raised the upper limit of its return on average equity target by one percentage point, to 14% in its latest IPO filing. S&P 500 life and health insurance stocks are up more than 1% this year, compared to an average decline of more than 15% in banks and brokerages.
One S&P 500 financial sector that has beaten life insurers is property and casualty insurers, which are up about 10% so far this year. AIG’s property and casualty peers, such as
are trading at a solid premium to book value, while AIG is currently trading less than 80% of the book. The more cash AIG raises from Corebridge – whose IPO prospects might look stronger now – the more it might be able to use to take advantage of the good yield it can get through share buybacks, while AIG is still trading at a discount to book. The stock is expected to reprice as the company sells its remaining stake in Corebridge over time. AIG expects to still hold a stake of more than 50% after the IPO.
Moreover, the time has come to finance the growth of property and casualty insurance, in particular commercial, because prices continue to rise. Tariffs rose 9% in global trade from a year ago, AIG reported. AIG’s core P&C insurance business continues to enjoy the benefits of the company’s longstanding underwriting overhaul. Adjusted pretax profit rose sharply for general insurance, to $1.2 billion in the first quarter from $845 million in the same period a year earlier. This was aided by an improvement of around 6 percentage points in the first quarter combined ratio – a measure of the percentage of premium consumed by claims and expenses – compared to last year at 92.9%.
There is also continued growth in turnover, which is also a reason to invest capital in the company today. Net premiums written in commercial lines increased by 8% in the first quarter, adjusted for currency fluctuations. There were also some jumps in personal insurance, including a rebound in North America travel insurance which has been hit by the pandemic shutdowns.
In business, timing can be everything. Now is the perfect time to sell some of the life insurance business and reinvest in a revitalized core.
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