(AIG) American International Group Loss Soars on Weak Dynamics

American International Group Inc. (AIG) reported third quarter operating loss per share of $1.60, which came in way higher than the Zacks Consensus Estimate of a loss of 8 cents and 84 cents reported in the year-ago quarter. Consequently, operating loss of $3.0 billion increased drastically from $114 million in the year-ago quarter.

On a GAAP basis, AIG reported a net loss of $4.1 billion or $2.16 per share as compared with $2.5 billion or $18.53 per share in the year-ago quarter. The reported quarter included net realized capital loss of $112 million against $33 million in the year-ago quarter, along with loss from divested operations of $1.0 million against gain of $4 million in the prior-year period.

Additionally, net loss from discontinued operations was recorded at $221 million versus $1.85 billion in the year-ago quarter. It also included non-qualifying derivative hedging gains of $187 million compared with $124 million in the year-ago quarter and deferred income tax valuation allowance charge of $1.18 billion against related release of $140 million in the year-ago quarter. AIG also recorded amortization charge on the Federal Reserve Bank of New York (FRBNY) credit facility of $779 million in the year-ago quarter.

Results reflected weak performance across all operating segments based on the challenging macro economic environment. This included volatile equity markets, widening credit spreads, reduced interest rates and higher property catastrophe losses. As a result, huge declines were witnessed in the market valuation of American International Assurance Co. Ltd (AIA), estimated future cash flows and reduced investment income from Maiden Lane III LLC and Maiden Lane II LLC. These factors also affected the book value per share adversely.

However, some stability was retained through improved premiums in the core insurance portfolio along with higher assets under management (AUM). AIG’s ongoing business restructuring process has enabled it to focus on quality insurance and investment products and services. The company also managed to reduce its Treasury loan during the quarter, thereby enhancing capital efficiency.

Segment Details

AIG’s Chartis (general insurance) business – conducted through Commercial & Consumer Insurance – reported operating income of $442 million compared with $1.1 billion in the year-ago quarter. The year-over-year decline primarily resulted from catastrophe (CAT) loss of $574 million, primarily due to catastrophes in the U.S., against $72 million in the year-ago quarter. Consequently, combined ratio deteriorated to 106.4% compared with 99.3% in the prior-year period. However, premiums written inched up 0.7% year over year to $9.2 billion on the back of favourable currency, improved pricing and retention.

Operating income at SunAmerica (life insurance services) reduced to $444 million from $1.0 billion in the year-ago quarter, based on low net investment income in Maiden Lane II. However, assets under management (AUM) edged up 2% year over year to $250.6 billion as of September 30, 2011. Unrealized gains totaled $4.9 billion compared with $4.6 billion as of June 30, 2011. Besides, premiums, deposits and other considerations were dramatically up 29% year over year to $5.7 billion, primarily driven by significant improvement in group retirement benefits along with both individual fixed and variable annuities.

Aircraft Leasing– conducted through International Lease Finance Corp. (ILFC) – recorded operating loss of $1.3 billion compared with $218 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 $1.5 billion of impairment charges resulting from ILFC’s annual review of its aircraft fleet.

Besides, ILFC’s rental revenues remained flat year over year at $1.1 billion. At the end of the reported quarter, the segment had an average fleet of 934 aircraft compared with 943 in the year-ago quarter. Going ahead, ILFC has long-term fleet contracts, while some are due next year.

The Other Operations – conducted through AIG Financial Products Corp (AIGFP) and other non-aircraft leasing – reported operating loss of $4.2 billion against $1.1 billion in the year-ago period.

Mortgage Guaranty’s operating loss contracted slightly to $96 million compared with $124 million in the year-ago quarter. Results reflect higher premiums offset by continued weakness in the housing market and unfavorable legal ruling.

Besides, AIG’s Direct Investment book (DIB), consisting of 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 $119 million compared with $54 million in the year-ago period. The upside was primarily driven by net gains on the credit valuation adjustments on the assets and liabilities of DIB.

Global Capital Markets, consisting of AIG Markets Inc. and the remaining AIGFP derivatives portfolio, reported an operating loss of $174 million compared to an income of $149 million in the year-ago quarter. The loss was driven by unrealized market valuation losses related to the super-senior credit default swap (CDS) portfolio. During the reported quarter, the net notional amount remaining in the AIGFP derivatives portfolio was reduced by $8 billion. This also included a reduction of $3 billion of super senior CDS contracts.

During the reported quarter, the fair value of the AIA ordinary shares declined by $2.3 billion from the prior quarter. Meanwhile, the fair value on AIG’s interest in Maiden Lane III decreased by $931 million compared with an increase of $301 million in the prior-year period.

As of September 30, 2011, AIG book value per common share on AIG shareholders’ equity reduced drastically by 92.4% year over year to $45.30. Besides, shareholders’ equity totaled $86.0 billion at the end of the reported quarter.

Share Repurchase Update

Yesterday, the board of AIG also announced the authorization of a share repurchase program worth $1.0 billion, par value $2.50 per share, through open market operations without any time limit. The buy backs will be initiated from time to time subject to market conditions.

Government Loan and Financial Update

On November 1, 2011, AIG announced that it repaid $972 million to the U.S. Treasury reduce the liquidation preference on one of the special purpose vehicles (SPV). Accordingly, the AIA SPV balance has been reduced to approximately $8.4 billion. Including this, the company has repaid about $45 billion so far in 2011.

In October this year, AIG announced the sanction of two new bank credit facilities totaling $4.5 billion. While one of the credit facilities is worth $3.0 billion granted by banks for four years, the other one is worth $1.5 billion for a 364-day period. The 4-year facility also includes a Letter of Credit (LoC) with a sub-limit of $1.5 billion, which can be taken out by both AIG and its subsidiaries, including Chartis, whenever required. Additionally, AIG had replaced the aforementioned new credit facilities with its existing ones, about the same value, that were announced in December last year.

In September this year, AIG issued $1.2 billion of 4.250% notes due 2014 and $800 million of 4.875% notes due 2016. The proceeds are expected to be used to pay maturing notes issued by AIG to fund the MIP.

Moreover, in August 2011, AIG reduced its government loan amount by $2.2 billion from the proceeds of the sale of its Nan Shan life insurance unit in Taiwan. As a result of this payment, AIG’s loan has shrunk to about $51 billion from $182.3 billion in 2008.

Peer Take

Last week, MetLife Inc. (MET) reported third quarter operating earnings per share of $1.11, triple pennies ahead of both the Zacks Consensus Estimate and the year-ago quarter. Operating earnings jumped 23% year over year to $1.18 billion from $958 million in the year-ago period, driven by robust growth from ALICO – acquired from AIG last year.

On Wednesday, Prudential Financial Inc. (PRU) reported third quarter earnings of $1.07 per share, significantly below the Zacks Consensus Estimate of $1.56 per share. Earnings also contrasted to $2.12 per share reported in the year-ago quarter.

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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