American International Group Inc (AIG) Earnings Preview: Q4 Profit Growth Jumps On Easy Comparisons

on February 12 2014 5:49 AM
  • AIG Jan 2013
    The AIG headquarters offices are seen in New York City's financial district. Reuters
  • AIG
    A man walks through a revolving door at an American International Group (AIG) building in New York's financial district September 16, 2008. REUTERS/Lucas Jackson
  • A man walks past the American International Group (AIG) building in New York's financial district
    A man walks past the American International Group (AIG) building in New York's financial district, March 16, 2009. REUTERS
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Insurance giant American International Group Inc. (NYSE:AIG) is likely to deliver strong earnings growth in the fourth quarter of 2013 as the company benefited from an easy comparison with a year-earlier period weighed down by Superstorm Sandy losses. Lower catastrophe losses in the last three months of 2013 and a stronger equity market also contributed to the bottom line.

AIG is to release earnings results on Thursday after markets close and will host a conference call the following morning at 8 a.m. EST.

The New York-based insurer is expected to report a profit of $1.01 a share on revenue of $8.56 billion in the fourth quarter of last year, according to the consensus estimate of analysts surveyed by Thomson Reuters. In the same period a year earlier, AIG reported a loss of $2.68 a share on revenue of $8.61 billion. Excluding one-time items, AIG is projected to report EPS of 96 cents, compared with 20 cents per share in the fourth quarter of 2012.

For the full year 2013, AIG probably earned $5.77 a share on revenue of $33.95 billion. In 2012, the company reported earnings of $2.04 a share on revenue of $34.87 billion.

AIG is one of the world’s largest insurers with a strong presence in global property-casualty insurance and U.S. life insurance and retirement savings. Over the past few years, AIG, which nearly collapsed in 2008, made significant progress in de-risking the company and was able to orchestrate a complete exit in 2012 from U.S. government ownership.

AIG President and CEO Robert Benmosche said on a conference call with analysts on Nov. 1 that he would stop providing specifics on progress toward the company’s so-called aspirational goals presented to the market during 2011’s re-IPO. While he was concerned about the Street's misinterpreting the goals as guidance, he also doesn’t think that reaching all of the goals by 2015 was likely.

Increasing per-share earnings “in the mid-teens” each year was among the objectives. The insurer also said it planned to generate $25 billion to $30 billion of capital for buybacks, dividends, acquisitions and organic growth, and cut general and administrative costs by $1 billion by the end of 2015.

“As we get closer to 2015, we feel that comments going forward are more like guidance rather than a direction that we’re all working towards,” Benmosche said on the conference call with analysts. “You can’t run this business with that degree of accuracy, and you all know that.”

Favorable Weather And Lack Of Catastrophes

Heading into the 2013 hurricane season, which runs from June 1 through Nov. 30, predictions appeared to indicate an extremely active level. For example, the National Oceanic and Atmospheric Administration forecast that seven to 11 hurricanes would form.

According to Deutsche Bank analyst Joshua Shanker, in an average year, there would have been eight tropical storms and four hurricanes (one of which would be “major” -- category 3 or higher). But in fact there were 10 tropical storms, two tropical depressions and two hurricanes (neither of them “major”).

“Overall, our reaction to fourth-quarter catastrophe activity and favorable weather is anticipating a tailwind for primary insurers, and even more so for reinsurers,” Shanker said in a research note. “We believe that the weather tailwind will help to drive the underlying margin expansion reported through the first nine months of last year.”

Shanker has revised the property and casualty catastrophe load assumptions down from $250 million to $205 million.

Investment Returns

The market fared less favorably for investment performance in the fourth quarter of 2013 as compared with the July-September period, with a general market run driven by anticipation of Federal Reserve tapering and an expansion of the risk-on mentality.

The S&P 500 (INDEXSP:.INX) decreased 1.6 percent from the open of the quarter through Oct. 8, before running up 9.4 percent into the Federal Open Market Committee meeting on Dec. 18. Ultimately, the S&P 500 closed the quarter up 9.9 percent.

“From a mark-to-market basis, the incremental equity market gain follows a strong first nine months and will continue to be a tailwind,” Shanker said. “Additionally, alternative investments should have several periods of improving results given that their correlation to equity markets and being reported on a delay, which should benefit AIG.”

Stock Performance

AIG resumed share repurchases in the third quarter of last year with $192 million of buybacks. Barclays insurance analyst Jay Gelb expects an additional $250 million of buybacks in the fourth quarter.

Following the government bailout in 2008, AIG has been trimming operations by divesting non-core operations. After more than four years attempting to cement some sort of deal, AIG finally announced in December that it is selling International Lease Finance Corp. to Dutch aircraft-leasing company AerCap Holdings N.V. (NYSE:AER).

As part of the deal, AIG is to receive $3 billion in cash and 97.56 million new AerCap shares. The transaction is expected to close in the second quarter and marks the last major disposition of AIG's noncore assets.

AIG’s net cash proceeds for this deal are $2.4 billion, and Gelb expects nearly all of this cash to be deployed for accretive share repurchases.

“AIG will also likely sell down its stake in AerCap over time, although there is a nine-to-15-month lock-up on shares, which should free up additional cash for buybacks,” Gelb said in a research note. Based on this structure, Gelb expects AIG share buybacks of $3 billion in 2014 and $7 billion 2015.

As a point of reference, each $1 billion of share buybacks equals approximately an addition of 8 cents per share annually.

However, “with expectations very high that 100 percent of ILFC proceeds will be used for buybacks, there seems room for disappointment if management takes a more cautious approach,” John Nadel, an analyst at Sterne Agee & Leach Inc. noted.

One of AIG’s main competitors in the insurance industry is the Travelers Companies Inc (NYSE:TRV). Other competitors in the sector include Hartford Financial Services Group Inc (NYSE:HIG), HCC Insurance Holdings, Inc. (NYSE:HCC) and American Financial Group (NYSE:AFG).

AIG is trading at around $49.18 a share. So far this year, the stock has lost 3.6 percent.

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