(AIG) American International Group Misses Expectations – Rebound to Come

American International Group Inc. (AIG) reported second quarter operating earnings of 69 cents per share that lagged both the Zacks Consensus Estimate of $1.15 per share and $1.18 per share reported in the year-ago quarter, due to an additional 1.655 billion shares issued to the U.S. Treasury Department on January 14, 2011.

However, operating income of $1.3 billion increased 60.9% from $793 million in the year-ago quarter.

On a GAAP basis, AIG reported a net income of $1.8 million or $1.00 per share as compared with net loss of $2.7 billion or $19.57 per share in the year-ago quarter.

The reported quarter included realized capital gains of $6 million against loss of $360 million the year-ago quarter, along with loss from divested operations of $1.0 million against gain of $36 million in the prior-year period and net income from divested operations of $10 million versus $467 million in the year-ago period.

Additionally net loss from discontinued operations was recorded at $49 million versus $2.62 billion in the year-ago quarter. It also included non-qualifying derivative hedging gains of $28 million compared with loss of $96 million in the year-ago quarter and deferred income tax valuation allowance release of $570 million against related charges of $576 million in the year-ago quarter.

AIG had also recorded amortization charge on the Federal Reserve Bank of New York (FRBNY) credit facility of $353 million in the year-ago quarter.

Results reflected retention of stability through American International Assurance Co. Ltd (AIA) coupled with its insurance operations managed to drive the premiums, pro forma book value per share and ROE during the quarter. These were, however, offset by higher catastrophe losses, underwriting losses and other unrealized losses amid the ongoing business restructuring process.

Segment Details

AIG’s General Insurance (Chartis) business swung to operating income of $789 million compared to $955 million in the year-ago quarter. The year-over-year decline primarily resulted from catastrophe (CAT) loss of $539 million, primarily due to catastrophes in the U.S. and New Zealand, against $300 million in the year-ago quarter.

Consequently, combined ratio deteriorated to 104% compared to 102% in the prior-year period. However, premiums written increased 17.6% year over year to $9.2 billion on the back of improved pricing and retention. While investment income inched up 2.6% year over year to $$1.14 billion, underwriting loss was higher at $353 million versus $158 million in the year-ago period.

Operating income at Domestic Life & Retirement Services (SunAmerica) reduced 13.4% year over year to $743 million based on low net investment income. However, assets under management (AUM) grew 9% year over year to $254.9 billion as of June 30, 2011.

Unrealized gains totaled $4.6 billion compared with $4.1 billion as of March 31, 2011. Besides, premiums, deposits and other considerations were dramatically up 23.7% year over year to $6.1 billion, primarily driven by significant improvement in both fixed and variable annuities.

Financial Services – conducted through International Lease Finance Corp. (ILFC) and AIG Financial Products Corp (AIGFP) – recorded operating loss of $145 million compared with operating income of $25 million in the year-ago quarter.

ILFC reported an operating income of $86 million against $182 million in the year-ago quarter. The reduction reflects reduction in the size of ILFC’s aircraft fleet under operating leases and impact of lower lease rates on used aircraft.

Operating loss from capital markets increased to $160 million from $154 million in the year-ago quarter, driven by unrealized market valuation losses related to the super-senior credit default swap portfolio. This was partially offset by improvement related to changes in credit spreads of derivatives as well as lower operating expenses. The active winding up of the remaining AIGFP derivatives portfolio was completed as of June 30, 2011.

The Other Operations reported operating income of $344 million, compared to a loss of $131 million in the year-ago period. Results reflected income of $1.5 billion from AIA during the reported quarter. Besides, unallocated corporate expenses of $261 million were down from $761 million in the prior-year quarter, the year-ago result reflecting a significant litigation reserve.

The United Guaranty Corporation (UGC) reported operating income of $13 million compared with $226 million in the year-ago quarter. Results reflect continued decline in newly reported delinquent loans in the reported quarter while the year-ago quarter reflect $232 million of favorable loss reserve development.

Besides, AIG’s Direct Investment business recorded operating income of $93 million compared with $307 million in the year-ago period, primarily driven by substantially wider spreads on liabilities. Meanwhile, the fair value on AIG’s interest in Maiden Lane III decreased by $667 million compared with an increase of $358 million in the prior-year period.

As of June 30, 2011, AIG reported operating return on equity (ROE) of 6.3% against 4.7% in the year-ago quarter. Besides, ROE increased 8.3% in contrast to no change in the prior-year period. Pro forma book value per common share on AIG shareholders’ equity increased 8.7% year over year to $49.18 in the reported quarter.

However, book value per common share on AIG shareholders’ equity crashed 91.3% year over year to $48.83 in the reported quarter.

Government Loan and Financial Update

On May 27, 2011, AIG and the Treasury Department completed a registered public offering of AIG’s common stock. While AIG issued and sold 100 million shares for approximately $2.9 billion, the Treasury Department sold 200 million shares of AIG for about $5.8 billion.

The successful completion of the stock offering has fizzled out the Treasury’s stake in AIG to 77% from 92%, leaving it with approximately 1.5 billion of equity shares and about $11.4 billion of preference shares in AIG.

The next session of share sale by the Treasury is expected only after the 120-day lock-up period. However, the entire stake is expected to be sold within the next two years. Post share offering, the Treasury owes about $53 billion to AIG. Besides, as a result of the recapitalization in the beginning of this year, AIG has fully repaid its debt to the Federal Reserve.

Business Update

On July 27, 2011, AIG’s agreement to sell its 97.6% stake in Nan Shan Life Insurance Co. Ltd. to a Taiwan-based Ruen Chen Group for $2.16 billion in cash received final approval from the Taiwanese regulators. The sale is expected to close in the third quarter of 2011. The parties had entered into the deal in January this year.

Peer Take

Last week, MetLife Inc. (MET) reported second quarter operating earnings per share of $1.24, surpassing the Zacks Consensus Estimate of $1.11 per share and $1.10 per share in the year-ago quarter. Operating earnings jumped 45% year over year to $1.33 billion from $914 million in the year-ago period, driven by robust growth from ALICO –  acquired from AIG last year.

On Wednesday, Prudential Financial Inc. (PRU) reported second quarter earnings of $1.71 per share that topped the Zacks Consensus Estimate of $1.55 as well as the prior-year quarter’s earnings of 88 cents. Results were aided by solid performance in the company’s U.S. annuities and asset management businesses as well as its international insurance operations that drove the top- and bottom-line significantly. As a result, the company has also hiked its dividend by 20%.

AMER INTL GRP (AIG): Free Stock Analysis Report

METLIFE INC (MET): Free Stock Analysis Report

PRUDENTIAL FINL (PRU): Free Stock Analysis Report

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