MET MetLife Inc

American International Group Inc. (AIG) reported fourth quarter operating earnings per share of 82 cents, which came in modestly higher than the Zacks Consensus Estimate of 61 cents as well as year-ago quarter’s loss of $15.99 per share. Consequently, operating income of $1.56 billion improved substantially from a loss of $2.21 billion in the year-ago quarter.

On a GAAP basis, AIG reported a net income of $19.8 billion or $10.43 per share as compared with $11.2 billion or $16.60 per share in the year-ago quarter. The reported quarter included net realized capital gain of $284 million against $165 million in the year-ago quarter.

Additionally, net loss from discontinued operations was recorded at $140 million versus $2.02 billion in the year-ago quarter. It also included non-qualifying derivative hedging gains of $35 million compared with $52 million in the year-ago quarter and deferred income tax valuation allowance of $17.78 billion as against related charge of $1.9 million in the year-ago quarter.

AIG had also recorded amortization charge on the Federal Reserve Bank of New York (FRBNY) credit facility of $708 million and a gain of $259 million from divested operations in the year-ago quarter.

Results reflected improved operating performance within Chartis and Aircraft Leasing segments, which was partially offset by reduced growth in SunAmerica and lower realized capital gains. Alongside, deferred tax asset benefit and income from American International Assurance Co. Ltd (AIA) and divestment of ALICO to MetLife Inc. (MET) boosted the earnings growth.

AIG’s ongoing business restructuring process has enabled it to focus on quality insurance and investment products and services. Lower catastrophe losses also improved the combined ratio, while stability was retained through improved premiums in the core insurance portfolio along with higher assets under management (AUM).

These factors also drove the book value per share and return on equity (ROE). The company also managed to reduce its remaining liquidation preference of preferred interests held by the Treasury during the quarter, thereby enhancing capital efficiency.

However, volatile equity markets, widening credit spreads and reduced interest rates continue to showcase declines in the estimated future cash flows and reduced investment income from Maiden Lane III LLC. Meanwhile, reduced top line and higher operating expenses persistently pressurize margins.

Total revenue declined 17.9% year over year to $17.41 billion during the reported quarter but exceeded the Zacks Consensus Estimate of $12.4 billion. Total benefits, claims and expenses escalated 116.6% year over year to $14.52 billion.

Segment Details

AIG’s Chartis (general insurance) business – conducted through Commercial & Consumer Insurance – reported operating income of $348 million as opposed to a loss of $4.0 billion in the year-ago quarter. The year-over-year upside primarily resulted from improvement in pricing trends, loss ratio and expense management in the current quarter. This complemented with a reserve strengthening charge, net of discount and loss-sensitive premium adjustments of $4.2 billion in the prior-year period.

However, catastrophe losses escalated to $467 million compared with $203 million in the year-ago quarter, primarily due to Thailand floods. Nevertheless, combined ratio improved to 107.3% compared with 160.5% in the prior-year period. Premiums written also climbed 3.6% year over year to $7.85 billion on the back of favourable currency, improved pricing, risk selection, business mix and retention.

Operating income at SunAmerica (life insurance services) inched down 1.1% year over year to $931 million, based on low net investment income given lower returns from hedge funds, private equity investments along with lower call and tender income. However, AUM edged up 3.3% year over year to $256.9 billion as of December 31, 2011, while net flows remained positive throughout 2011.

Besides, premiums, deposits and other considerations were modestly up 16.3% year over year to $5.7 billion, primarily driven by significant improvement in group retirement benefits along with individual variable annuities, partially offset by decline in fixed annuities.

Aircraft Leasing – conducted through International Lease Finance Corp. (ILFC) – recorded operating income of $119 million against a loss of $606 million in the year-ago quarter. The upside reflects $40 million of impairment, fair value adjustments, and other reserve charges against $742 million in the year-ago quarter.

However, rental revenues declined 8.3% year over year to $1.1 billion, driven by lower net overhaul revenues. At the end of the reported quarter, the segment had an average fleet of 932 aircrafts compared with 936 in the year-ago quarter. Going ahead, ILFC has long-term fleet contracts, while about 17 are due for re-leasing this year.

The Mortgage Guaranty – conducted through United Guaranty Corporation (UGC) – recorded operating loss of $23 million against an income of $154 million in the year-ago quarter. Results reflected higher premiums offset by continued weakness in the housing market as new delinquencies remained high.

The Other Operations – conducted through AIG Financial Products Corp (AIGFP) and other non-aircraft leasing – reported operating income of $979 million compared with $12 million in the year-ago period.

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 loss of $27 million against an income of $394 million in the year-ago period.

Global Capital Markets, consisting of AIG Markets Inc. and the remaining AIGFP derivatives portfolio, reported an operating income of $46 million, severely down from $293 million reported in the year-ago quarter.

During the reported quarter, the fair value of the AIA ordinary shares increased by about $1.0 billion from the prior quarter. Additionally, the fair value on AIG’s interest in Maiden Lane III also improved by $208 million compared with an increase of $382 million in the prior-year period.

Full-Year 2011 Highlights

For full-year 2011, AIG reported operating net income of $1.83 billion or $1.02 per share against a net loss of $898 million or $6.57 per share in 2010. This also exceeded the Zacks Consensus Estimate of 77 cents per share.

On a GAAP basis, AIG reported a net income of $17.8 billion or $9.44 per share as compared with $7.79 billion or $11.60 per share in 2010. However, catastrophe losses surged to $3.3 billion against $1.1 billion in 2010.

Total revenue declined 17.1% year over year to $67.24 billion in 2011 but exceeded the Zacks Consensus Estimate of $59.3 billion. Total benefits, claims and expenses grew 9.6% year over year to $65.30 billion.

AIG exited 2011 with total assets of $555.77 billion, down from $683.44 billion in 2010. Meanwhile, operating cash flow decreased to $35 million from $16.9 billion at 2010-end. Shareholders' equity totaled $105.8 billion at the end of 2011, down from $113.2 billion at the end of 2010.

As of December 31, 2011, AIG book value per common share on AIG shareholders' equity escalated by 18.2% year over year to $55.33, reflecting the deferred tax benefit. Besides, operating ROE came in at 6.9% for the reported quarter and 2.2% for 2011 against nil returns recorded in the year-ago periods.

Share Repurchase Update

In November 2011, the board of AIG announced the authorization of a share repurchase program worth $1.0 billion, with par value of $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.

Consequently, AIG repurchased about $70 million of common stock at an average price of $22.75, during the reported quarter.

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.

During the same month last year, AIG exchanged $2.4 billion of its outstanding junior subordinated debentures for $1.8 billion in newly issued senior notes, resulting in a pre-tax gain on extinguishment of debt of $484 million.

In October 2011, 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, by the same value, that were announced in December 2010.

Peer Take

Last week, MetLife reported fourth quarter operating earnings per share of $1.31, modestly ahead of both the Zacks Consensus Estimate of $1.24 and year-ago quarter’s earnings of $1.18. Operating earnings escalated 17% year over year to $1.4 billion, driven by robust growth from ALICO, which was acquired from AIG in 2010, and higher-than-expected derivative gains.

Meanwhile, on February 8, 2012, another close competitor, Prudential Financial Inc. (PRU) reported core operating earnings of $1.97 per share for the fourth quarter, substantially higher than the Zacks Consensus Estimate of $1.76. Results were positively impacted, primarily by a three-fold increase in International earnings, led by Japan acquisitions earlier during 2011.

 
AMER INTL GRP (AIG): Free Stock Analysis Report
 
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