AIG Q3 Earnings Shine on Improved Top Line; Boosts Buyback

American International Group Inc. (AIG) reported third-quarter 2014 operating earnings per share (EPS) of $1.21, which outpaced the Zacks Consensus Estimate of $1.08 by 12% and the year-ago quarter EPS of 96 cents by 26%. With this result, the company kept its earnings streak alive and marked four straight quarters of earnings beat averaging 15.7%.

American International Group, Inc - Quarterly EPS (:BNRI) | FindTheBest

Operating net income escalated 22.8% year over year to $1.75 billion primarily on improved performance across core segments, lower claims and interest expenses as well as higher net realized gains and investment income. These positives were partially offset by higher loss on extinguishment of debt and tax expenses.

On a GAAP basis, including extraordinary items, AIG reported a quarterly net income of $2.19 billion or $1.54 per share, compared with $2.17 billion or $1.47 per share in the year-ago quarter.

Total revenue climbed 4.5% year over year to $16.65 billion. Modest growth was generated from premiums, fees, investment income, net realized gains and others. These were partially offset by absence of revenues from aircraft leasing, which was $1.12 billion in the year-ago quarter.

Meanwhile, total benefits, claims and expenses decreased 7.7% to $13.64 billion, primarily due to lower claims, benefits and interest expenses as well as nil aircraft leasing expenses.

Segment Details

AIG Property Casualty (P&C) – conducted through Chartis and its sub-segments: Commercial & Consumer Insurance – reported pre-tax income of $1.21 billion, up 7.2% from the year-ago quarter. The upside resulted from higher premiums, net realized gains and investment income, partially offset by higher claims, operating and acquisition expenses as well as catastrophe losses. However, underwriting loss widened to $169 million from $134 million in the year-ago quarter.

Meanwhile, investment income rose 4.3% year over year to $1.27 billion. Net premiums written also grew 3.4% to $8.95 billion, while net premiums earned improved 2.4% to $8.63 billion. While premiums improved in mid-single digits in commercial insurance, these remained flat in the consumer, while pre-tax catastrophe losses amplified to $284 million from $222 million in the year-ago quarter. Subsequently, combined ratio deteriorated marginally to 102% from 101.6% in the year-ago quarter.

Reported pre-tax income at AIG Life and Retirement (conducted through SunAmerica) escalated 55.6% year over year to $1.93 billion owing to improved policy fees, investment income and other income. These were partially offset by lower premiums and net realized gains. Notably, legal settlements worth $490 million weighed on the bottom line.

Additionally, assets under management (AUM.TO) jumped 10% year over year to $334 billion as of Sep 30, 2014 driven by positive net flows within variable annuities and price appreciation of invested assets.

Additionally, premiums and deposits grew 15% year over year to $9.66 billion, while net investment income rose 6%. Increases in individual variable as well as income on alternative investments were witnessed due to effective spread management, although fixed annuities sales declined. Alongside, run-off of older businesses with higher crediting rates supported results. However, investment yields were lower at 5.11% against 5.26% in the year-ago quarter, owing to persistent low interest rates in the reinvestment portfolio.

Other Operations reported operating income of $204 million versus loss of $575 million in the year-ago period. Alongside, upsides in the reported quarter primarily reflected higher net realized gains and lower legal reserves, partially offset by loss on extinguishment of debt of $472 million.

Within this segment, Mortgage Guaranty – conducted through United Guaranty Corporation (:UGC) – recorded an operating income of $135 million, up from $43 million in the year-ago quarter, driven by higher premiums and underwriting income. While net premiums written remained flat year over year, net premiums earned grew 11%, although domestic first-lien new insurance written decreased 11% due to deteriorated mortgage originations.

In addition, AIG’s Direct Investment book (:DIB), comprising the Matched Investment Program (MIP.TO) and non-derivative assets and liabilities of the previous AIG Financial Products Corp. (:AIGFP) portfolios, recorded operating income of $314 million versus $110 million in the year-ago period.

Global Capital Markets, consisting of AIG Markets Inc. and the remaining AIGFP derivatives portfolio, recorded an operating income of $58 million, rising from $29 million in the year-ago quarter.

Meanwhile, AIG recorded equity in pre-tax operating earnings from AerCap of $196 million. Interest expenses reduced to $310 million from $334 million in the year-ago quarter, while corporate expenses were almost flat at $280 million. Notably, income tax expense increased to $900 million from $307 million a year ago.

Financial Update

At the end of Sep 2014, total investments came in at $366.4 billion, up from $356.4 billion at 2013-end. Total cash decreased to $1.93 billion from $2.24 billion at 2013-end. Shareholder equity totaled $108.6 billion, up from $100.5 billion at the end of 2013, while total assets decreased to $527.2 billion from $541.3 billion at 2013-end. Operating cash flow surged to $4.36 billion at Sep 2014-end from $3.95 billion in the year-ago period.

Meanwhile, long-term debt declined to $36.2 billion from $41.7 billion at 2013-end based on effective liability management. This also improved the total debt-to-capital ratio to 16.4% from 17.3% at 2013-end and 17.6% at Sep 2013-end.

During the reported quarter, AIG reduced DIB debt by redemption of $790 million worth of 4.875% notes due 2016 and that of 3.80% notes totaling $1.25 billion, due 2017. In Oct 2014, this debt was further minimized by redeeming 8.25% notes worth $2 billion due 2018 and bought back another $405 million 5.45% mid-term notes. All the redemptions were implemented by using cash allocated to DIB.

In Jul 2014, the company bought back senior and hybrid notes worth $2.5 billion, while 8.175% hybrid notes worth $1.6 billion were repurchased in Oct 2014.

Alongside, AIG issued 5-year notes (due 2019) worth $1.0 billion at 2.3% and another 30-year notes (due 2044) worth $1.5 billion at 4.5%, all in Jul 2014. In Oct 2014, an additional 4.5% senior notes worth $750 million were issued that are due 2044.

At the end of Sep 2014, AIG’s reported book value per common share, including accumulated other comprehensive income, rose 15.3% year over year to $77.35. However, operating return on equity (:ROE) improved to 6.4% from 5.8% in the year-ago period.

Capital Deployment Update

AIG bought back about 24.8 million shares for $1.5 billion during the reported quarter, overall repurchasing shares about $3.4 billion until Nov 3 this year.

On Nov 3, 2014, the company’s board sanctioned another $1.5 billion of stock repurchases, to be implemented gradually. This was backed by the successful completion of the share buybacks worth $2 billion and $1.0 billion stock that was authorized in Jun 2014 and Feb 2014, respectively. AIG had $1.5 billion of stock available for repurchases as on Nov 3, 2014.

On Nov 3, 2014, the board declared its regular quarterly dividend of 12.5 cents per share, payable on Dec 18, 2014 to shareholders of record on Dec 4.

On Sep 25, 2014, AIG paid its regular quarterly dividend of 12.5 cents per share to shareholders of record as on Sep 11.

In Feb 2014, the company had hiked its quarterly dividend by 25% from the prior payout of 10 cents a share. The company had re-initiated dividend payouts in Aug 2013.

Zacks Rank

Currently, AIG carries a Zacks Rank #2 (Buy).

Peer Take

A look at the broader insurance sector reflects that AIG and its peers like MetLife Inc. (MET) and Lincoln National Corp. (LNC) have benefited from improved investment income as well as higher net realized capital gains given the growth in alternative investments and equity market appreciation. Top line of these insurers also improved due to higher premiums.

AIG’s close competitor, Prudential Financial Inc. (PRU) is scheduled to report third-quarter 2014 earnings after the closing bell on Nov 5.

Read the Full Research Report on AIG
Read the Full Research Report on MET
Read the Full Research Report on LNC
Read the Full Research Report on PRU


Zacks Investment Research