American International Group (AIG) 2Q13 Results

American International Group (AIG) reported 2Q13 earnings on August 2, 2013 [Source] with some nice surprises. It is another strong operating quarter with net income attributable to AIG at $2.7 billion up 17% from $2.3 billion in the 2Q12. Diluted earnings per common share that take important share count into consideration and recognize share repurchases over the past year, showed income from continuing operations to be $1.82/share up 48% from $1.23/share for the 2Q13. The $1.82/share operating income also compared favorably to analysts’ expectations of $0.86/share for this quarter.

A very positive surprise was the Board of Directors declared a quarterly dividend on AIG common stock of $0.10 per share and authorized the repurchase of up to $1.0 billion of AIG Common Stock. These actions were approved even with another delay in the sale of the non-core International Lease Finance Corporation (ILFC) to a Chinese consortium.  Returning capital to shareholders through the dividend and the announced resumption of share repurchases is a testament to AIG’s strong capital position. If the ILFC sale to the Chinese consortium does not occur it will only be a temporary setback as AIG would likely spin it off when market conditions warrant, perhaps before year end.

AIG Collage

During June, 2013 AIG was designated a Systemically Important Financial Institution (SIFI) by the U.S. Treasury Financial Stability Oversight Council. In light of this designation the company’s financial position was still strong enough in the eyes of the regulators to permit the resumption of the dividend and share buyback shortly thereafter. AIG’s proactive acceptance of the SIFI designation and advanced preparation for it makes for a much stronger risk adjusted return investment.

How much stronger? We received an anecdotal answer during the conference call: in response to a question on how the dividend and buyback decision came about, CEO Robert Benmosche described AIG’s financial strength in his straight forward way: “So, for AIG, we go through a process over the planning period of 2013 and 2014, what would happen if we underperformed our profit budget by $23 billion, what happens during that same time if the S&P [500] is down close to 700? What happens if the…credit spreads widened dramatically about 400 basis points?  At the same time, what happens if unemployment doesn’t go in the 10s, but goes to 12.5%?”

“By the way if that’s not enough, what would happen to AIG if in fact housing prices were to drop 20% from here knowing the amount of mortgages we have on our books positive mortgage insurance businesses as well. And, by the way since you are an insurance company, why don’t you throw a storm Sandy in there and make sure that you got enough money to cover that storm at the same time. That’s in English what a stress bust is and I have given it to you 10,000 feet and we show the board that after all of that, we could maintain our CMA levels, maintain the risk based capital in this company at those levels which are required for our ratings.”

“I would think if that kind of scenario occurred, the states would be really pleased that we could at least meet our minimum regulatory requirements and work our way back up. We are not talking about minimums. We are talking about the CMA levels, so based upon that the board said, we think it’s down for you to at this time proceed with your dividend and proceed with a $1 billion share buyback. If ILFC closes or when ILFC closes, the board and we will look at what we prepare, we will then update our stress test, update the information we will share with the board, we will share with the rating agencies. And based upon all of that, the board will make a decision and so that’s how the process works.”

In our post “Measuring AIG Going Forward” [Source] we discussed how we’ll monitor the improvement in operations through the aspirational goals. This follows the 2Q13 earnings release below. A number of the catalysts we anticipated are now in place to increase share price to the intrinsic value of the company; continued operation improvements, elimination of uncertainty with the definition of SIFI requirements, resumptions of dividend payments, and share buybacks.

A key metric, value per share in 2Q13 book was $66.02/share an increase of $5.44/share or 9.0% from the year ago 2Q12 period. Book value per share declined from the 1Q13 from $67.41 reflecting primarily the impact of the recent rise in interest rates on unrealized investment gains. However, AIG will benefit from rising interest rates overtime with positive impacts on revenue and earnings in the future. Our investment thesis is on track.

AIG 2Q13 Thesis Progress

The Highlights:

  • Declared cash dividend of $0.10/share
  • Share repurchase authorization of $1 billion
  • Reduced debt by $931 million
  • $1.3 billion of dividends and loan repayments
  • As of August 1, 2013, the closing of the ILFC transaction has not occurred

NEW YORK, August 1, 2013 – American International Group, Inc. (NYSE: AIG) today reported net income attributable to AIG of $2.7 billion for the quarter ended June 30, 2013, compared to $2.3 billion for the second quarter of 2012. After-tax operating income attributable to AIG was $1.7 billion for the second quarters of both 2013 and 2012.

Diluted earnings per share attributable to AIG were $1.84 for the second quarter of 2013, compared with $1.33 for the second quarter of 2012. After-tax operating income per share attributable to AIG was $1.12 for the second quarter of 2013, compared with $0.96 in the second quarter of 2012. Net income attributable to AIG for the quarter exceeded after-tax operating income attributable to AIG largely due to valuation allowance releases associated with deferred tax assets from capital loss carry forwards.

“AIG’s solid performance this quarter demonstrates the strength of our diverse global operations,” said Robert H. Benmosche, President and Chief Executive Officer of AIG. “These results underscore our businesses’ strong fundamentals and reflect our continued commitment to meeting and exceeding the expectations of our customers across all facets of our organization.

“We are pleased with our continued progress and focus on fundamentals as the new AIG – a stronger, simpler, more focused company with a renewed vision and vigor for the future,” Mr. Benmosche added. “Our profits this quarter illustrate the success of our continued focus on our core insurance operations and ongoing commitment to capital management. Our property casualty, life and retirement, and mortgage insurance businesses all posted strong operating results. In particular, we witnessed strength this quarter in underwriting improvements and the successful continuation of the shift in our business mix in AIG Property Casualty, disciplined spread management in AIG Life and Retirement, strong performance in our investments, and continued improvement in our mortgage insurance business where about half of net premiums earned in the second quarter of this year were from business written post-2008.”

Mr. Benmosche concluded, “Our dedication to operating as one unified company is yielding positive results, and we continue to believe that the benefits of increased collaboration across our company will build and improve upon this quarter’s strong earnings.”

Second Quarter Key Themes:

AIG 2Q13 Key Themes

AIG Conference Call Presentation [Source]

Financial Highlights:

AIG 2Q13 Financial Highlights

After-tax Operating Income (Loss):

AIG 2Q13 Operating Income

Strong Capital Position:

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

AIG Capital Position

Parent Liquidity:

AIG continues to expect $4-5 billion in annual dividends and distributions from the insurance subsidiaries.

AIG Liquidity

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.

During the quarter there were varying degrees of improvement on the goals but there is still work to be done. The good news is if they had a great quarter and while still not meeting their full potential. This implies there is the potential for still more gains and many levels.

AIG 2Q13 ROE Progress

Some deterioration in the P&C combined ratio and excellent improvement in the home mortgage insurance combined ratio:

AIG Combined Ratio Progress

AUM showed a decrease of $3.2 billion from the prior quarter and up $25.9 billion over previous year. Investment yields continue to face strong headwinds industry wide in the low interest rate environment. AIG’s yields decreased to 5.83% from 6.38% the previous quarter but up from 5.71% the year ago period:

AIG 2Q13 AUM and Yield Progress

Disclosures:

Long AIG common stock and AIG warrants.

Reference:

  • AIG 2Q13 Webcast and Presentation [Source]
  • AIG Financial Supplement [Source]

 

 

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