American International Group Inc. (AIG - Analyst Report) reported fourth-quarter 2012 operating earnings per share of 20 cents, significantly beating the Zacks Consensus Estimate of a loss of 9 cents. However, earnings fell from the year-ago quarter’s 77 cents per share. Consequently, operating net income plunged to $29 million from $1.5 billion in the year-ago quarter.
On a GAAP basis, AIG reported a quarterly net loss of $4.0 billion or $2.68 per share as compared with net income of $3.4 billion or $2.04 per share in the year-ago quarter. The reported quarter primarily included a loss from the sale of International Lease Finance Corp. (ILFC) of $4.33 billion, legacy and other tax adjustments of $200 million and net realized capital loss of $52 million. These were partially offset by legal settlements of $129 million and deferred income tax valuation allowance release of $116 million.
Results reflected operating growth in the life insurance business and higher investment income along with stronger underwriting margins and higher profitability in Direct Investment Book (DIB). These factors also drove the book value per share and return on equity (ROE), while also enhancing capital efficiency. However, higher interest expenses, lower premiums and higher catastrophe losses offset most of the upsides. Volatile equity markets, widening credit spreads and reduced interest rates were the other dampeners.
AIG’s Chartis (property-casualty (P&C) insurance) business – conducted through Commercial & Consumer Insurance – reported an operating loss of $945 million against an income of $367 million in the year-ago quarter. The year-over-year downside primarily resulted from a catastrophe loss of $2.0 billion owing to Hurricane Sandy. This also drove the claims and operating expenses higher and led to an underwriting loss of $2.16 billion.
Excluding the catastrophe loss, operating income surged to $1.0 billion in the reported quarter, driven by growth from higher value business, improvement in pricing trends, strong underwriting margins and higher investment income.
Subsequently, combined ratio deteriorated to 125.1% compared with 107.1% in the prior-year period, reflecting higher catastrophe losses and adverse reserve development. However, premiums earned declined 3.9% year over year to $8.61 billion on the back of unfavorable currency, risk selection, business mix and retention. Both commercial and consumer insurance segments reported losses on account of changes in business mix and higher investments in direct marketing.
Operating income at SunAmerica (life insurance and retirement services) escalated 19.5% year over year to $1.09 billion based on higher net investment income and policy fees, partially offset by lower base yields and interest crediting rates. Additionally, AUM rose 13% year over year to $290.4 billion as of Dec 31, 2012.
Nevertheless, premiums, deposits and other considerations declined 11.9% year over year to $5.2 billion, primarily driven by a significant decline in fixed annuities amid the low rate environment. Conversely, group retirement products and individual variable annuities witnessed modest improvement.
The Mortgage Guaranty – conducted through United Guaranty Corporation (UGC) – recorded an operating loss of $45 million, wider than a loss of $25 million in the year-ago quarter, driven by increased loss reserves. Consequently, net premiums written rose 18% year over year to $236 million.
The Other Operations – conducted through AIG Financial Products Corp (AIGFP) and other non-aircraft leasing – reported operating income of $260 million versus $502 million in the year-ago period.
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 $509 million against a loss of $27 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 $300 million, significantly improving from $46 million in the year-ago quarter. Additionally, the fair value of the AIA Group Ltd. (AIA) ordinary shares increased $240 million from the prior quarter.
Meanwhile, the Aircraft Leasing business, conducted through ILFC, has been declared a discontinued operation following the decision to sell 90% of ILFC in Dec 2012, to a Chinese consortium. The deal awaits regulatory approvals and is scheduled to culminate by the second quarter of 2013.
Full-Year 2012 Highlights
For full-year 2012, AIG’s operating EPS stood at $3.93, exceeding both the Zacks Consensus Estimate of $3.82 and $1.16 recorded in 2011. Operating net income escalated to $6.6 billion from $2.1 billion in 2011. However, on a GAAP basis, including adjustments related to discontinued operations, legal, tax and others, net income plunged to $3.4 billion or $2.04 per share in 2012 from $20.6 billion or $11.01 per share in 2011.
Total revenue at SunAmerica improved 4.2% year over year to $15.95 billion in 2012, while premiums earned at Chartis declined 2.3% to $34.87 billion.
Shareholders' equity totaled $98.0 billion at the end of Dec 2012, down from $101.5 billion at the end of 2011.
At the end of 2012, AIG’s book value per common share, including accumulated other comprehensive income, escalated 24% year over year to $66.38. Further, operating ROE improved to 7.2% at 2012-end against 2.7% recorded at 2011-end.
Government Loan and Credit Update
During the reported quarter, the U.S. Treasury wound up its ownership in AIG by selling the remaining 15.9% stake for $7.61 billion. The Federal Reserve (Fed) has earned an additional profit of $22.7 billion, apart from the $182.3 bailout loan amount from AIG.
Accordingly, the remaining 234.2 million shares were priced at $32.50 a share, for a total amount being about $7.61 billion. However, the Fed will continue to retain the warrants in order to buy about 2.7 million shares of AIG in the future, the sale of which is likely to generate additional positive returns to the U.S. taxpayers. Moreover, no shares were purchased by the company.
In Dec 2012, AIG also wound up its remaining stake at AIA for about $6.5 billion and gained $240 million. The company realized total gains of $2.1 billion in 2012.
AIG carries a Zacks Rank #4 (Sell). Other strong performers in the insurance sector include CNO Financial Group Inc. (CNO - Analyst Report) , Assured Guaranty Ltd. and Aegon NV (AEG - Snapshot Report) , all of which carry a Zacks Rank #1 (Strong Buy).