American International Group (AIG) 1Q13 Results: Bring on Tomorrow!

American International Group (AIG) reported 1Q13 earnings on May 2, 2013 [Source]: It is a strong report as operating profits were $1.98 billion or $1.34/share compared to analysts’ expectations of $0.88/share. When compared to 1Q12, AIG’s profits fell 35% from $3.05 billion, or $1.71/share. The year ago Q12 results included $3.3 billion in pre-tax income from investments that AIG exited as part of their restructuring making prior year comparisons inconsistent.

Netting out onetime and restructuring effects shows it was a very good quarter. A significant operational improvement was made in AIG’s Property and Casualty (P&C) reporting a combined ratio of 97.3% in the 1Q13 compared to 102.1 in the year ago 1Q12 period for a 4.8% beneficial drop. A combined ratio below 100 means the insurer is actual profitable as premiums are exceeding claims; above 100 claims exceed premiums.

Bring on TomorrowThe majority of the restructuring is complete, government shares sold, and Systemically Important Financial Institution (SIFI) requirements expected soon. The 1Q13 P&C combined ratio improvement is an example of then operation improvements needed going forward to realize the full value of this investment. Management recognized this underlying need for operations improvement when they developed enterprise wide, long term ”aspirational goals” during the 1Q11 for the key operational metrics of the company.

In our post “Measuring AIG Going Forward” [Source] we discussed how we’ll monitor the improvement in operations using the aspirational goals. This follows our 1Q13 earnings discussion below. There are a number of remaining catalysts to increase share price to the intrinsic value of the company including; continued operation improvements, elimination of uncertainty with the definition of SIFI requirements, resumptions of dividend payments, and share buybacks.

Bob Benmosche, President and CEO, started the conference reinforcing the focus on operations improvement or fundamentals as he calls it“…the focus of our Company and all the people of AIG has been fix the foundation to get the fundamentals right… We’ve been focusing on the core and I think what you see in the first quarter is another strong quarter of the fundamentals. This is a quarter we had some positives. Last quarter we had Sandy which was a negative, but if you look at the core and we’re going to talk about that this morning, we continue to fundamentally do very well here.”

Our key metric, 1Q13 book value per share was $67.41/share an increase of $9.73/share or 16.8% from the year ago 1Q12 period. On our investment thesis is on track and there is likely a lot more to come from this investment. Bring on Tomorrow Indeed!

1Q13 Thesis Progress

The Highlights:

  • Parent company liquidity of $15.0 billion.
  • First quarter 2013 net income of $2.2 billion; after tax operating income of $2.0 billion.
  • Book value per share of $67.41, up 16.8% from prior year first quarter
  • Book value per share, excluding Accumulated other comprehensive income (AOCI), of $59.39, up 12 percent from the prior-year first quarter
  • Insurance operating income of $3.0 billion, up 28 percent, from the prior-year first quarter

NEW YORK, May 2, 2013 – American International Group, Inc. (NYSE: AIG) today reported net income attributable to AIG of $2.2 billion and after-tax operating income of $2.0 billion for the quarter ended March 31, 2013, compared to net income attributable to AIG of $3.2 billion and after-tax operating income of $3.0 billion for the first quarter of 2012. The prior-year first quarter included $3.3 billion of pre-tax income from investments in AIA Group Limited (AIA), Maiden Lane II LLC (ML II), and Maiden Lane III LLC (ML III) that were sold or liquidated in 2012.

Diluted earnings per share attributable to AIG and after-tax operating income per share attributable to AIG were $1.49 and $1.34, respectively, for the first quarter of 2013,compared with diluted earnings per share attributable to AIG and after-tax operating income per share attributable to AIG of $1.71 and $1.62, respectively, for the first quarter of 2012.

 AIG’s results this quarter reflect the depth of our global operations, the market’s demand for the products and services we offer, and the strong performance of our investment portfolio,” said Robert H. Benmosche, AIG President and Chief Executive Officer. “We are pleased with these results and look to continue to build on our successes, especially as we continue to make progress towards achieving our 2015 aspirational goals.

First Quarter Key Themes:

1Q13 Key Themes

AIG Conference Call Presentation [Source]

Financial Highlights:

1Q13 Financial Highlights

AIG Conference Call Presentation [Source]

After-tax Operating Income (Loss):

1Q13 Income

AIG Conference Call Presentation [Source]

Strong Capital Position: The company has a strong capital position. Continued strong dividend flows from the insurance companies are helping to strengthen liquidity.

1Q13 Capital PositionAIG Conference Call Presentation [Source]

Parent Liquidity: AIG continues to expect $4-5 billion in annual dividends and distributions from the insurance subsidiaries. Available liquidity is $15 billion that includes $5.5 billion allocated toward future maturities of liabilities and contingent liquidity stress needs.

1Q13 Liquidity

AIG Conference Call Presentation [Source]

Enterprise Goals: Following the completion of the Recapitalization, AIG is developing business plans for its operations in relation to certain long-term aspirational goals. Among the most significant of AIG’s enterprise-wide long-term aspirational goals are the following:

  • to increase its ROE to 10 percent or more by the year ended December 31, 2015, from its 6.2 percent normalized ROE as of and for the year ended December 31, 2010; and
  • to achieve average annual percentage growth of its EPS in the mid-teens through the year ended December 31, 2015, from normalized EPS of $2.62 for the year ended December 31, 2010.

This quarter saw tremendous improvement gained in the Return on Equity and EPS growth rate nearing the goal and exceeding the goal respectively.

1Q13 ROE EPS Progress

Excellent improvement in P&C combined ratio and the home mortgage insurance combined ratio; showing both units running profitable insurance operations by pricing risk appropriately:

1Q13 Combined Ratio Progress

Good progress on the AUM goal increasing $6.5 billion or 12% over previous year, investment yields are facing strong headwinds industry wide in the low interest rate environment. AIG’s yield decreased to 6.38% from 6.51% vs. previous year:

1Q13 Life Ins Progress

Disclosures: Long AIG common stock and AIG warrants.

Reference:

  • AIG 1Q13 Press Release [Source]
  • AIG 1Q13 Webcast and Presentation [Source]
  • AIG Financial Supplement [Source]
  • AIG 1Q13 SEC 10Q [Source]

 

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