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August 11, 2009:
American International Group (NYSE:AIG)
American International Group, Inc.. The Group's principal activity is to provide general and life insurance operations, financial services, retirement savings and asset management. The Group is a holding company, which operates through its subsidiaries in the United States and other countries.
The general insurance includes writing of all lines of property and casualty insurance. Life insurance includes individual and group life, annuity, endowment and accident and health policies, single premium annuity, variable annuities, guaranteed investment contracts, universal life and pensions.
The financing services include aircraft leasing, consumer and premium financing and banking services. Retirement savings and asset management includes variable annuities, mutual funds and investment asset management.
Financial Summary
American International Group, Inc. (AIG) reported its first quarterly profit in their recently released (8-7-09) second quarter results since the third quarter of 2007, as certain of its businesses stabilized and the company’s results reflected positive valuation changes. AIG also achieved several important milestones in its restructuring program.
For the second quarter ended June 30, 2009, AIG reported net income attributable to AIG of $1.8 billion, including net income attributable to AIG common shareholders of $311 million or $2.30 per diluted common share, compared with a net loss of $5.4 billion or $41.13 per diluted share in the second quarter of 2008. Second quarter 2009 adjusted net income was $2.0 billion, compared with an adjusted net loss of $1.3 billion in the second quarter of 2008.
Commenting on the second quarter results, AIG Chairman and Chief Executive Officer Edward M. Liddy said, “Our results reflect stabilization in certain of our businesses. The primary drivers of our positive second quarter results were reductions in net realized capital losses, primarily due to the decline in other than temporary impairments resulting from the adoption of new accounting guidance and improved market conditions; positive valuation changes for our Maiden Lane interests on a net basis; continued reductions in the risk profile of the AIG Financial Products Corp. portfolio; a reduction in the allowance for recoverability of deferred tax assets, reflecting the effect of recently announced transactions; and gains on hedges not accounted for under FAS 133.
While our insurance companies’ operating results remain challenged, largely driven by weak economic conditions and the lingering effect of negative AIG events earlier in the year, performance trends stabilized from the first quarter. We continue to focus on stabilizing and strengthening our businesses, but expect continued volatility in reported results in the coming quarters, due in part to accounting charges related to ongoing restructuring activities. In particular, we expect that permanent reductions in the Federal Reserve Bank of New York credit facility related to the issuance of the preferred interests in the ALICO and AIA special purpose vehicles, which upon closing will substantially reduce our debt to the FRBNY, will result in accelerated amortization of a portion of the prepaid commitment asset approximating $5 billion before tax,” Mr. Liddy said.
Analyst Consensus
EPS
| Quarter | Actual | Mean | High | Low | # of Estimates |
| Last Q (Jun. 09) | 2.57 | 1.67 | 2.23 | 1.10 | 2 |
| Current Q (Sep. 09) | -.92 | .92 | .92 | 1 | |
| Next Q (Dec. 09) | -.49 | .49 | .49 | 1 | |
| Current FY (Dec. 09) | -1.23 | 10.2 | -12.65 | 2 |
Rating: HOLD
Investment Highlights
GENERAL INSURANCE
General Insurance results in the second quarter 2009 included operating income before net realized capital gains of $1.0 billion, compared to $1.7 billion in the second quarter of 2008. The second quarter’s results reflect a decline in underwriting profit as the combined ratio increased 6 points to 98.2. However, for the first six months of 2009, the current accident year combined ratio was 95.0. Net investment income in the second quarter declined $81 million from the comparable prior year period due to lower yields and lower partnership income.
The Commercial Insurance combined ratio was 99.8 in the second quarter 2009, an increase of 5.9 from the comparable prior year period. The loss ratio for accident year 2009 recorded in the second quarter was 3.2 points higher than the loss ratio for the accident year 2008 recorded in the second quarter of 2008, reflecting the rate environment and increased loss trends in the quarter.
The Foreign General Insurance combined ratio was 95.5 in the second quarter 2009, an increase of 6.1 from the comparable prior year period. The increase is primarily attributable to the expense ratio, which increased 4.9 points due to an increase in separation costs, restructuring charges, bad debt expenses, and decreased earned premium Underwriting results in Europe and Far East regions held up well with strong underwriting profits in the current quarter.
General Insurance net premiums written were $7.9 billion in the second quarter 2009, a 19.2 percent decline compared to last year’s second quarter. Commercial Insurance reported net premiums written in the second quarter 2009 of $5.0 billion, a decrease of 18.2 percent compared to the second quarter 2008. The change was primarily driven by the economy’s continued effect on construction, real estate and transportation-related business, the unit’s strategic decision to maintain price discipline across its business lines, including in workers’ compensation, as well as returned premiums related to loss sensitive business. These items represented approximately half of the decline in premiums, while the remainder of the decrease stemmed from the overall effect of the weak economy, our underwriting discipline, and the effect of AIG’s challenges on the business across the entire portfolio.
Foreign General Insurance reported $3.0 billion in net premiums written in the second quarter 2009, a decline of 20.7 percent compared to the second quarter 2008. The effect of foreign exchange and the sale in 2008 of its Brazilian operations contributed 14 percent of the decline in premiums.
General Insurance continues to retain the vast majority of its customers. Business retention was down moderately in the second quarter 2009 compared to the prior year period. Despite challenging economic conditions, second quarter 2009 new business writings exceeded $1 billion. In General Insurance, underwriting discipline resulted in continued rate improvement in the second quarter 2009 as the Commercial Insurance unit’s rate change was approximately 2.0 percent positive.
At June 30, 2009, General Insurance net loss and loss adjustment reserves totaled $60.0 billion, an increase of $604 million from March 31, 2009. The foreign exchange effect for the second quarter of 2009 was an increase in reserves of $972 million. For the second quarter of 2009, net adverse loss development from prior accident years, excluding accretion of discount, was approximately $60 million.
At June 30, 2009, overall net loss and loss adjustment reserves including non-core insurance businesses totaled $65.8 billion, a decrease of $6.7 billion from March 31, 2009. The decrease is primarily attributable to the deconsolidation of Transatlantic in the second quarter of 2009.
LIFE INSURANCE AND RETIREMENT SERVICES
Life Insurance and Retirement Services second quarter 2009 operating income before net realized capital gains was $1.5 billion, reflecting a difficult, but improving, operating environment. The second quarter results were affected by lower assets under management in the investment-oriented product and annuity businesses both in the U.S. and overseas and lower net investment income resulting from lower partnership income, lower yields on higher levels of short-term liquidity, and lower yields due to re-positioning of the investment portfolio. Net realized capital losses were significantly lower than in the past several quarters due to improving market conditions and the adoption of new accounting pronouncements. In addition, the comparison to the second quarter of 2008 shows a decline due to the significant DAC benefits related to realized capital losses experienced in 2008.
Premiums and other considerations were $8.1 billion in the second quarter of 2009, down 15.3 percent from the second quarter 2008 but relatively flat with the first quarter of 2009, as businesses continue to stabilize. Premiums, deposits, and other considerations amounted to $13.0 billion, a decline of 48.6 percent compared to the second quarter of 2008. The decline was due principally to lower sales of investment-oriented life and retirement services products as sales efforts remained challenged due to the general decline in global equity markets and the lingering effect of negative AIG events earlier in the year.
In AIG’s Foreign Life Insurance and Retirement Services operations, sales activity has continued to improve in most regions, although sales activity in foreign investment-oriented life and retirement products, especially in Japan and Korea, remain negatively affected by equity market performance. AIA and ALICO have experienced improved operating results following the announcements of the SPV transactions and re-branding initiatives. Revenues remained strong during the quarter, and earnings before realized capital gains and losses were largely in line with the prior year, factoring in the effects of foreign exchange.
Domestic Life and Retirement Services second quarter 2009 operating income of $457 million showed marked improvement over both the first quarter of 2009 and the second quarter of 2008, as realized capital losses subsided, equity markets improved over the prior quarter, and mortality experience in the life insurance business was favorable. At June 30, 2009, assets under management (owned and managed assets) totaled $192.4 billion, up from $190.6 billion at December 31, 2008. Life insurance in force was $969.0 billion at June 30, 2009, as compared with $1,025.8 billion at December 31, 2008.
While surrender levels were higher in the second quarter of 2009 as compared with the same period in 2008, surrender activity has stabilized and surrender rates declined during the second quarter of 2009 as compared to the first quarter. Premiums, deposits, and other considerations were down 22.7 percent from the first quarter of 2009 and 46.5 percent from the second quarter of 2008, due to negative AIG publicity and as certain bank and broker-dealer distributors continued to place restrictions on new sales, primarily due to concerns over negative AIG publicity.
FINANCIAL SERVICES
Financial Services reported a $103 million operating loss before net realized capital gains (losses) and the effect of hedges not accounted for under FAS 133 in the second quarter of 2009, compared to a $5.9 billion operating loss in the second quarter of 2008.
AIGFP, which is in the process of winding down its businesses and portfolios, reported a $132 million operating loss in the second quarter of 2009 compared to a $6.2 billion loss in the second quarter of 2008. The second quarter 2009 operating loss included $636 million in unrealized market valuation gains on its super senior credit default swap portfolio and $702 million of interest charges on inter-company borrowings with AIG that are eliminated in consolidation.
International Lease Finance Corporation (ILFC) reported operating income of $335 million, compared to income of $352 million in the second quarter of 2008. Lower flight equipment marketing activity and higher depreciation expense was partially offset by an increase in rental revenue from a larger aircraft fleet compared to the second quarter of 2008.
American General Finance, Inc. (AGF) reported a second quarter 2009 operating loss of $202 million compared to an operating loss of $40 million in the second quarter of 2008, primarily due to declines in finance charges and other revenues, reflecting the sales of real estate portfolios as part of AGF’s liquidity management efforts and a $22 million increase in the provision for finance receivable losses in response to higher levels of delinquencies and net charge-offs partially offset by improvements in operating and interest expense.
ASSET MANAGEMENT
Asset Management reported a second quarter 2009 operating loss before net realized capital losses of $300 million, compared to operating income of $150 million in the second quarter of 2008. The quarter’s results reflect impairments on proprietary real estate and private equity investments and lower partnership and dividend income.
OTHER OPERATIONS
AIG’s Other category includes interest expense, restructuring costs, expenses of corporate staff not attributable to specific business segments, expenses related to efforts to improve internal controls, corporate initiatives and certain compensation plan expenses.
Parent Company results in the second quarter 2009 included an operating loss before net realized losses of $1 billion, compared to a $745 million loss in the second quarter of 2008, primarily due to interest expense on the FRBNY credit facility and restructuring expenses partially offset by interest income on inter-company loans (eliminated in consolidation) and a gain associated with the change in fair value of AIG’s interest in ML III.
During the second quarter of 2009, AIG realigned its financial reporting structure to reflect the effects of its restructuring activities on how management views and manages its businesses. Accordingly, the results for Transatlantic, Personal Lines (excluding Private Client Group), Mortgage Guaranty, and HSB Group Inc. are now included in AIG’s Other category. These amounts were previously reported as part of the General Insurance operating segment. The Private Client Group is now reported in the Commercial Insurance sub-segment. Prior period amounts have been revised to conform to the current presentation.
Noncore business results in the second quarter 2009 included operating income before net realized gains (losses) of $108 million, compared to a $315 million operating loss in the second quarter of 2008 primarily due to the gain associated with the change in fair value of AIG’s interest in ML III.
Technical Analysis
Shares of American International Group Inc. (AIG) have recently gone 'topside' of their 20 and 50-day MA (Moving Averages) respectively, as the stock appears to have undergone a tremendous 'short squeeze' on enormous volume during the past several trading sessions. While issues still remain with regard to the fundamental aspect of AIG, clearly, as evidenced by the chart below, the stock finds itself in a much healthier posture.
Having said that, relative strength is hovering at the RSI 70 level, which depicts a short-term overbought condition. Thus, some pause or consolidation may be necessary after such a powerful move.
Comparable Companies:
Bank of America Corp. (NYSE: BAC); CitiGroup Inc. (NYSE:C); JPMorgan Chase & Co. (NYSE:JPM); Hartford Financial Services Group, Inc. (NYSE:HIG); Allianz SE (NYSE:AZ)
