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American International Group Inc. (AIG - Analyst Report) reported second-quarter 2012 operating earnings per share of $1.06, outshining the Zacks Consensus Estimate of 59 cents as well as year-ago quarter’s earnings of 68 cents per share. Consequently, operating net income surged 49.8% to $1.86 billion from $1.24 billion in the year-ago quarter.
On a GAAP basis, AIG reported a quarterly net income of $2.33 billion or $1.33 per share as compared with $1.84 billion or $1.00 per share in the year-ago quarter. The reported results primarily included net realized capital gains of $300 million against $51 million in the year-ago quarter.
Additionally, loss from discontinued operations was recorded at $5 million versus $49 million in the year-ago quarter. It also included non-qualifying derivative hedging gains of $14 million against $25 million in the year-ago quarter and deferred income tax valuation allowance of $1.28 billion as against $588 million in the year-ago quarter.
The reported quarter also included legacy and litigation reserves of $798 million, coupled with loss from changes in benefit reserves worth $359 million against $28 million in the year-ago period, along with a positive change in fair value of SunAmerica’s fixed securities worth $45 million.
Results reflected improved top line along with enhanced operating performance across segments, which were partially offset by reduced premiums growth in SunAmerica and Chartis as well as a decrease in the fair value of American International Assurance Co. Ltd (AIA) and higher operating expenses. Alongside, fair value of Maiden Lane III LLC boosted the earnings growth.
AIG’s ongoing business restructuring process has enabled it to focus on quality insurance and investment products and services. In addition, lower catastrophe losses also improved the combined ratio, while stability was retained through higher assets under management (AUM) in SunAmerica.
These factors also drove the operating cash flow, book value per share and return on equity (ROE). The company also managed to reduce the interests held by the Treasury during the quarter, thereby enhancing capital efficiency.
However, volatile equity markets, widening credit spreads and reduced interest rates continue to showcase declines and persistently pressurize margins. Total revenue climbed 2.7% year over year to $17.12 billion during the reported quarter and exceeded the Zacks Consensus Estimate of $12.43 billion. Total benefits, claims and expenses edged up 3.3% year over year to $15.37 billion.
AIG’s Chartis (general insurance) business – conducted through Commercial & Consumer Insurance – reported operating income of $936 million, up 19.5% from $783 million in the year-ago quarter. The year-over-year upside primarily resulted from improvement in pricing trends and growth from higher value business, partially offset by higher underwriting expenses and loss ratio. This complemented with a year-over-year reduction of 9.0% in claims and adjusted expenses that significantly reduced to $6.06 billion.
Subsequently, combined ratio improved to 102.4% compared with 104.0% in the prior-year period. Excluding catastrophe losses of $328 million during the reported quarter, combined ratio stood at 98.3% against 97.7% in the year-ago period.
However, premiums earned edged down 2.4% year over year to $8.82 billion on the back of unfavourable currency, risk selection, business mix and retention. While growth decelerated in commercial insurance segment, improved results were witnessed in the consumer insurance segment.
Operating income at SunAmerica (life insurance services) increased 29.0% year over year to $933 million, based on reinvestment of cash during 2011, higher base yield and disciplined management of interest crediting rates. These were partially offset by lower income from call, tender and lower alternative investments. Also, AUM climbed 5.1% year over year to $267.8 billion as of June 30, 2012, while net flows remained positive for the sixth consecutive quarter.
Nevertheless, premiums, deposits and other considerations declined 14.3% year over year to $5.4 billion, primarily driven by significant declines in fixed annuities amid the low rate environment, although rollover deposits exhibited improvement. Conversely, group retirement products, individual variable annuities and retail mutual funds witnessed modest improvement.
Aircraft Leasing – conducted through International Lease Finance Corp. (ILFC) – recorded operating income of $88 million against $86 million in the year-ago quarter. Rental revenues remain unchanged on a year-over-year basis at $1.1 billion, given the re-lease of older aircraft at lower rates.
The Mortgage Guaranty – conducted through United Guaranty Corporation (UGC) – recorded operating income of $43 million against $12 million in the year-ago quarter, driven by low delinquency rates. Consequently, net premiums written rose 11.0% year over year to $212 million.
The Other Operations – conducted through AIG Financial Products Corp (AIGFP) and other non-aircraft leasing – reported operating income of $664 million compared with $114 million in the year-ago period.
In addition, AIG’s Direct Investment book (DIB), consisting of the Matched Investment Program (MIP) and the non-derivative assets and liabilities of the previous AIG Financial Products Corp. (AIGFP) portfolios, recorded operating income of $434 million against $61 million in the year-ago period.
Global Capital Markets, consisting of AIG Markets Inc. and the remaining AIGFP derivatives portfolio, recorded an operating loss of $25 million, though improving from a loss of $160 million reported in the year-ago quarter.
During the reported quarter, the fair value of the AIA ordinary shares decreased by about $493 billion from the prior quarter. Additionally, the fair value on AIG’s interest in Maiden Lane III also improved by $1.31 billion compared with a decrease of $667 million in the prior-year period.
AIG exited the reported quarter with total assets of $555.38 billion, down from $555.77 billion at 2011-end. Shareholders' equity totaled $104.7 billion at the end of June 2012, up from $101.5 billion at the end of 2011. Meanwhile, operating cash flow surged to $1.63 million from cash outflow of $3.54 billion in the prior-year period.
As of June 30, 2012, AIG’s book value per common share, including accumulated other comprehensive income, escalated by 31.8% year over year to $60.58. Further, operating ROE improved to 7.7% for the reported quarter against 6.6% recorded in the year-ago period.
Government Loan and Credit Update
In July 2012, AIG received the full repayment of $5.0 billion against its equity interest in Maiden Lane III along with contractual and additional distributions of $1.1 billion. Henceforth, AIG will continue to receive 33% of proceeds generated by future sales of Maiden Lane III assets.
In June 2012, the outstanding loan by the Federal Reserve to Maiden Lane III was fully repaid. As of June 30, 2012, the Federal Reserve realized $12.7 billion of profits, interest and fees from AIG. Excluding profits, the company repaid $35.6 billion to the government in the first half of 2012.
In May 2012, the U.S. Treasury raised about $5.7 billion from the sale of about 189 million shares for an average price of $30.50, par value of $2.50 a share. This was above the government’s break-even price of $28.73 per AIG share.
While AIG repurchased 65.6 million shares for $2.0 billion, the remaining $3.0 billion worth of stock was raised through open market operations. The total stock sale, in turn, reduced Treasury’s stake in the company to 63% from 70%, while the Treasury still owns about 1.25 billion shares of AIG. Currently, the company owes below $30 billion to the U.S. government.
During the reported quarter, AIG also raised $1.5 billion from long-term unsecured notes, while ILFC raised approximately $753 million in secured debt in order to refinance existing secured debt and to purchase aircraft.
Earlier this week, MetLife Inc. (MET - Analyst Report) reported second-quarter 2012 operating earnings per share of $1.33, smoothly outpacing both the Zacks Consensus Estimate of $1.25 and year-ago quarter’s earnings of $1.13. Operating earnings escalated 18% year over year to $1.43 billion.
The promising results were primarily the outcome of a robust earnings growth across U.S., Asia and EMEA along with improved underwriting results, higher net investment income, higher-than-expected derivative gains as well as reduced operating expenses. These were partially offset by lower-than-expected top-line growth.
Another close competitor, Prudential Financial Inc. (PRU - Analyst Report) reported core operating earnings for the second-quarter of 2012 of $1.34 per share, trailing much lower than the Zacks Consensus Estimate of $1.55. Moreover, the results dwindled 14.7% on a year- over- year basis. The lackluster earnings were primarily the outcome of higher claims experience and expense levels, partially offset by revenue growth and a lower share count.
Currently, AIG carries a Zacks Rank #2, which implies a short-term Buy rating, although the long-term recommendation remains Neutral.