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American International Group Inc. (AIG - Analyst Report) reported first-quarter 2013 operating earnings per share of $1.34, significantly beating the Zacks Consensus Estimate of 88 cents. However, earnings fell from the year-ago quarter’s $1.62 per share. Consequently, operating net income plunged to $1.98 billion from $3.05 billion in the year-ago quarter.

On a GAAP basis, including extraordinary items, AIG reported a quarterly net income of $2.21 billion or $1.49 per share as compared with $3.21 billion or $1.71 per share in the year-ago quarter. The year-ago results include pre-tax income from the fair value of the AIA Group Ltd. (AIA) and Maiden III, totaling $3.05 billion.

Results reflected operating growth in the insurance businesses along with stronger underwriting results, lower expenses and higher profitability in Direct Investment Book (DIB). These factors also drove book value per share and combined ratio, while enhancing capital efficiency. However, higher interest expenses, lower investment income and lower return on equity (ROE) were the partial dampeners. Volatile equity markets, widening credit spreads and reduced interest rates were the other downsides.

Total revenue decreased 9.2% year over year to $15.89 billion, although it surpassed the Zacks Consensus Estimate of $12.55 billion. Meanwhile, total benefits, claims and expenses marginally increased 0.2% to $13.06 billion.

Segment Details

AIG Property Casualty (P&C) – conducted through Chartis and its sub-segments: Commercial & Consumer Insurance – reported an operating income of $1.6 billion, up 76.3% from $910 million in the year-ago quarter. The year-over-year upside was a result of lower claims and acquisition expenses, which led to an underwriting income of $231 million against a loss of $180 million in the year-ago quarter. Moreover, investment income increased 11% to $1.36 billion.

However, net premiums written dipped 4.3% year over year to $8.4 billion on the back of unfavorable currency and the effect of recognizing ceded premiums written for excess of loss reinsurance agreements at the beginning of the contract rather than over the entire period of the contract. Excluding this factor, net premiums written increased 4% year over year during the reported quarter.

Both the commercial and consumer insurance segments reported operating income on account of high value business mix as well as enhanced risk selection and pricing initiatives. Subsequently, combined ratio improved to 97.3% from 102.1% in the year-ago quarter.

Operating income at AIG Life and Retirement (conducted through SunAmerica) escalated 82.1% year over year to $1.57 billion based on higher premiums and policy fees as well as lower mortality costs and positive spreads. These were partially offset by lower net investment income, base yields and interest crediting rates. Additionally, AUM rose 12% year over year to $297 billion as of Mar 31, 2013.

Additionally, premiums, deposits and other considerations stood flat at $5.6 billion. A significant decline in fixed annuities amid the low rate environment was offset by improvement in variable annuities. Meanwhile, retail and institutional segments witnessed modest improvement.

Other Operations reported operating loss of $152 million versus an income of $2.3 billion in the year-ago period. Within this, Mortgage Guaranty – conducted through United Guaranty Corporation (UGC) – recorded an operating income of $41 million, higher than $8 million in the year-ago quarter, driven by increased mortgage originations as well as new and expanded distribution channels. Consequently, net premiums written rose 28.8% year over year to $246 million.

In addition, AIG’s Direct Investment book (DIB), comprising 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 $329 million against a loss of $156 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 $227 million, significantly improving from $92 million in the year-ago quarter.

Financial Update

At the end of Mar 2013, total investments stood at $369.7 billion, down from $375.8 billion at 2012-end. Total cash increased to $1.23 billion from $1.15 billion at 2012-end, while long-term debt declined to $45.3 billion from $48.5 billion at 2012-end.

Shareholder equity totaled $99.5 billion, up from $98.0 billion at the end of 2012, whereas total assets marginally increased to $548.9 billion from $548.6 billion at 2012-end.

At the end of Mar 2013, AIG’s book value per common share, including accumulated other comprehensive income, escalated 16.9% year over year to $67.41. However, operating ROE reduced to 9.2% from 12.8% in the year-ago period.

Others

Along with AIG, its peers MetLife Inc. (MET - Analyst Report), Cigna Corp. (CI - Analyst Report) and Prudential Financial Inc. (PRU - Analyst Report) carry a Zacks Rank #2 (Buy).

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