AIG's Q4 Earnings Shine on Low Cost, Ups Div

American International Group Inc. (AIG) reported fourth-quarter 2013 operating earnings per share (EPS) of $1.15, which remarkably outpaced the Zacks Consensus Estimate of 96 cents and the year-ago quarter figure of 22 cents. Subsequently, operating net income soared to $1.7 billion from a mere $290 million in the year-ago period.

On a GAAP basis, including extraordinary items, AIG reported a quarterly net income of $1.98 billion or $1.34 per share, rebounding from a net loss of $3.96 billion or $2.68 per share incurred in the year-ago quarter.

Total revenue inched up 1% year over year to $17.35 billion. Meanwhile, total benefits, claims and expenses plunged 34.5% to $15.2 billion, primarily due to lower catastrophe losses leading to a sharp decline in claims and benefits, while raising the bottom line.

Segment Details

AIG Property Casualty (P&C) – conducted through Chartis and its sub-segments: Commercial & Consumer Insurance – reported pre-tax income of $1.09 billion, significantly up from a loss of $944 million in the year-ago quarter. The upside was a result of stable premiums earned, higher net investment income and lower claims, acquisition and operating expenses. Underwriting loss shrank to $330 million from $2.16 billion in the year-ago quarter.

Meanwhile, investment income increased 17% year over year to $1.42 billion. Net premiums written stood almost flat at $8.62 billion. Higher premiums were recorded in the commercial insurance segment on account of high value business mix as well as enhanced risk selection and pricing initiatives. However, these were offset by lower premiums in the consumer segment.

While pre-tax catastrophe losses of $208 million drastically reduced from $2 billion in the year-ago quarter, combined ratio improved to 103.8% from 125.1% in the year-ago quarter.

Reported pre-tax income at AIG Life and Retirement (conducted through SunAmerica) escalated 29% year over year to $1.41 billion based on higher premiums and policy fees as well as higher income across retirement, retail and institutional segments. Additionally, assets under management (:AUM) rose 10% year over year to $318 billion as of Dec 31, 2013 driven by positive net flows.

Additionally, premiums, deposits and other considerations spiked 54% year over year to $8.04 billion. A significant surge in individual variable and fixed annuities as well as retail mutual funds and income on alternative investments was witnessed due to effective spread management, driving 6% growth in net investment income.

Other Operations reported operating loss of $62 million versus income of $300 million in the year-ago period, primarily due to the incurrence of severance charge of $265 million in the reported quarter. This is because AIG is initiating a 3% cut in its global workforce or about 1,500 employees, along with centralization of operations to lower cost locations, thereby improving operating efficiencies. Conversely, a gain of $240 million from the fair value of the AIA Group Ltd. (AIA) was recorded in the year-ago quarter.

Within this, Mortgage Guaranty – conducted through United Guaranty Corporation (:UGC) – recorded an operating income of $48 million, substantially higher than loss of $45 million in the year-ago quarter, driven by increased originations for home purchases as well as new and expanded distribution channels. Net premiums written rose 8% to $255 million due to growth of the first-lien in-force book.

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 $418 million compared with $509 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 a mere $194 million, significantly deteriorating from $300 million in the year-ago quarter.

Meanwhile, the Aircraft Leasing business, has been declared a continued operation once again. Total aircraft leasing revenue edged up 3.6% year over year to $1.12 billion. However, the business recorded operating loss of $189 million against an income of $69 million in the year-ago quarter.

Full-Year 2013 Highlights

For full-year 2013, AIG’s operating EPS stood at $4.56, comfortably exceeding both the Zacks Consensus Estimate of $4.38 and the 2012 equivalent of $3.93. Operating net income inched up 1.9% year over year to $6.76 billion. On a GAAP basis, net income soared to a whopping $9.09 billion or $6.13 per share in 2013 from $3.44 billion or $2.04 per share in 2012.

However, total revenue dipped 3.3% year over year to $68.68 billion, primarily due to lower premiums, net investment income and aircraft leasing revenue. Conversely, total benefits, claims and expenses also declined 12.9% to $58.31 billion in 2013.

Financial Update

At the end of Dec 2013, total investments stood at $346.4 billion, down from $375.8 billion at 2012-end. Total cash increased to $2.24 billion from $1.15 billion at 2012-end. Shareholder equity totaled $100.5 billion, up from $98.0 billion at the end of 2012, while total assets shrunk to $541.3 billion from $548.6 billion at 2012-end.

Meanwhile, long-term debt declined to $41.7 billion from $48.5 billion at 2012-end based on effective liability management. During the reported quarter, AIG issued $1.0 billion of 4.125% senior notes due 2024 and bought back debt worth $1.1 billion that bore an average coupon over 7.5%. This also improved the total debt-to-capital ratio to 17.3% from 20.5% at 2012-end.

Additionally, in Jan 2014, AIG reduced DIB debt by $2.2 billion using cash and short term investments allocated to it. This included redemption of $1.2 billion of 4.25% notes that were due 2014 and a repurchase of $1.0 billion of 8.25% notes due 2018.

At the end of Dec 2013, AIG’s book value per common share, including accumulated other comprehensive income, rose 3.4% year over year to $68.62. As well, operating ROE improved to 7.5% from 7.2% in 2012.

Capital Deployment Update

AIG bought back about 8.3 million shares for $405 million during the reported quarter and worth $600 million of stock in 2013. Concurrently, the board sanctioned another $1.0 billion of stock repurchases, to be implemented gradually. Including $400 million from the prior $1.0 billion authorization executed in Aug 2013, AIG now has $1.4 billion stock available for repurchases.

Additionally, the board of AIG hiked its regular quarterly dividend by 25% to 12.5 cents per share from prior 10 cents, which was re-initiated in Aug 2013. The hiked dividend is payable on Mar 25, 2014 to shareholders of record as on Mar 11.

On Dec 19, 2013, AIG paid a regular quarterly dividend of 10 cents per share to shareholders of record as on Dec 5.

Others

Along with AIG, Kemper Corp. (KMPR), Aegon NV (AEG) and Radian Group Inc. (RDN) carry a Zacks Rank #2 (Buy).

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