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AIG Q2 Earnings Rise on Low Expense & Buyback, Top Line Down

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American International Group Inc. (AIG - Free Report) reported operating earnings per share (EPS) of $1.25, which surpassed the Zacks Consensus Estimate of $1.05 by 19% and was higher than the year-ago quarter EPS of $1.12 by 11.6% on lower share count. With this result, the company kept its earnings streak alive and marked four straight quarters of earnings beat averaging 13.5% in 2014.

Subsequently, operating net income jumped 10.8% year over year to $1.83 billion, primarily on lower claims expenses, partially offset by lower net realized gains and weak investment income.



On a GAAP basis, including extraordinary items, AIG reported a quarterly net income of $3.07 billion or $2.10 per share, compared with $2.73 billion or $1.84 per share in the year-ago quarter. Notably, in May 2014, the company divested International Lease Finance Corp. (ILFC) to AerCap Holdings NV (AER) for about $7.6 billion, while post-tax gain on sale of $1.4 billion or 96 cents per share was recorded in the reported quarter.

However, total revenue decreased 12.6% year over year to $16.11 billion. Modest growth from premiums, fees and investment income were more than offset by revenues from net realized gains, aircraft leasing and others.

Meanwhile, total benefits, claims and expenses plunged 23.8% to $11.63 billion, primarily due to lower claims and benefits as well as reduced interest and 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 $1.49 billion, escalating 23.7% over the year-ago quarter. The upside resulted from a fall in lower claims and acquisition expenses and higher net realized gains, partially offset by lower investment income. Underwriting income stood at $101 million against a loss of $223 million in the year-ago quarter.

Meanwhile, investment income sank 4.2% year over year to $1.25 billion. Net premiums written also dipped 0.5% to $9.21 billion, although net premiums earned improved 2.2% to $8.53 billion. Marginally improved premiums were recorded across the commercial insurance and consumer segments, while pre-tax catastrophe losses reduced to $139 million from $316 million in the year-ago quarter. Subsequently, combined ratio improved to 98.8% from 102.6% in the year-ago quarter.

Reported pre-tax income at AIG Life and Retirement (conducted through SunAmerica) plummeted 27.3% year over year to $1.25 billion owing to reduced investment income, higher benefit and expenses as well as significantly lower net realized gains. However, premiums and policy fees witnessed improvement. Additionally, assets under management (AUM) rose 13% year over year to $332.8 billion as of Jun 30, 2014 driven by positive net flows and price appreciation of invested assets.

Additionally, premiums, deposits and other considerations grew 9% year over year to $7.4 billion. Increases in individual variable and fixed annuities as well as income on alternative investments were witnessed due to effective spread management. Alongside, run-off of older businesses with higher crediting rates supported results. However, net investment income dipped 2.9% owing to lower yields.

Other Operations reported operating income of $1.69 billion versus $251 million in the year-ago period. The growth in income was primarily due to higher gains on divested operations (ILFC), partially offset by net realized losses.

Within this segment, Mortgage Guaranty – conducted through United Guaranty Corporation (UGC) – recorded an operating income of $210 million, up from $73 million in the year-ago quarter, driven by higher underwriting income. Net premiums written declined 9% to $249 million due to persistent deterioration of the first-lien in-force book.

In addition, AIG’s Direct Investment book (DIB), comprising the Matched Investment Program (MIP) and non-derivative assets and liabilities of the previous AIG Financial Products Corp. (AIGFP) portfolios, recorded operating income of $313 million versus $591 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 $245 million, which marked a steep rise from $175 million in the year-ago quarter.

Meanwhile, the Aircraft Leasing business recorded nil operating income against $18 million in the year-ago quarter. Total aircraft leasing revenue plunged to $489 million from $1.11 billion in the year-ago quarter. The company also recorded equity in pre-tax operating earnings from AerCap of $53 million.

Financial Update

At the end of Jun 2014, total investments came in at $370 billion, up from $356.4 billion at 2013-end. Total cash decreased to $1.83 billion from $2.24 billion at 2013-end. Shareholder equity totaled $108.2 billion, up from $100.5 billion at the end of 2013, while total assets decreased to $529.1 billion from $541.3 billion at 2013-end. Operating cash flow dipped to $1.64 billion at Jun 2014-end from $1.67 billion in the year-ago period.

Meanwhile, long-term debt declined to $29.6 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 17.7% at Jun 2013-end.

In May 2014, AIG reduced DIB debt by redemption of $750 million worth of 3.0% notes due 2015, using cash allocated to it.

In Jul 2014, the company bought back senior and hybrid notes worth $2.5 billion, while also issuing 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%.

Concurrently, AIG agreed to settle consolidated class-action lawsuits with its shareholders with a payment of $960 million, subject to court approval.

At the end of Jun 2014, AIG’s reported book value per common share, including accumulated other comprehensive income, rose 14.5% year over year to $75.71. Moreover, operating return on equity (ROE) improved to 7.7% during the reported quarter from 7.4% in the year-ago period.

Capital Deployment Update

AIG bought back about 18.1 million shares for $1.1 billion during the reported quarter, overall repurchasing shares about $2.0 billion in the first half of 2014.

In Jun 2014, the company’s board sanctioned another $2.0 billion of stock repurchases, to be implemented gradually, after successfully completing the buyback of $1.0 billion stock authorized in Feb 2014. AIG had $1.5 billion stock available for repurchases at Jun 2014-end.

On Aug 4, 2014, the board declared its regular quarterly dividend of 12.5 cents per share, payable on Sep 25, 2014 to shareholders of record on Sep 11.

On Jun 25, 2014, AIG paid its regular quarterly dividend of 12.5 cents per share to shareholders of record as on Jun 10.

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.

Stocks to Consider

Currently, AIG carries a Zacks Rank #3 (Hold). Investors interested in the sector may consider better-ranked insurers like AmTrust Financial Services Inc. (AFSI - Free Report) , Endurance Specialty Holdings Ltd. and White Mountains Insurance Group Ltd. (WTM - Free Report) , all of which sport a Zacks Rank #1 (Strong Buy).

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