American International Group Inc. announced its first capital return since its 2008 bailout, through a dividend and share buyback, sending its shares up 6 percent after the bell.
The insurer, which was almost wiped out by its derivative bets in the crash five years ago, reported a quarterly profit that handily beat Wall Street estimates, along with a quarterly divided of 10 cents and a share buy back of up to $1 billion.
“Return of the quarterly dividend as well as the buyback is a clear affirmation of the progress AIG has made since the mortgage crisis,” Macquarie Equities Research analyst Amit Kumar said in an email to Reuters.
The company also reported strong growth at its property casualty insurance unit, indicating it was on track to improve profitability after a long-awaited turnaround.
The insurer has not paid dividends since receiving the first portion of a U.S. taxpayer-funded bailout in 2008 that eventually topped $180 billion. AIG finished paying back those funds early this year.
“AIG is a fundamentally different, simpler company than it was three years ago,” Chief Executive Robert Benmosche said in a statement.
Insurers have had trouble raising prices in their property and casualty businesses for some time, and losses from weather events and other natural disasters have also hurt the business.
AIG has not reported an annual underwriting profit since 2007, but the first quarter seems to have been a turning point.
“Investors want to see that AIG is recovering and driving margins by transforming its property and casualty business,” said Josh Stirling, an insurance analyst with Sanford C. Bernstein.
The company said that as of Thursday the sale of its aircraft leasing unit, International Lease Finance Corp (ILFC), has not yet been closed.
AIG has been trying to offload the business for years, as part of its post-crisis restructuring and capital-raising plans, but had trouble finding a buyer.
It agreed to sell a majority of ILFC to a consortium of investors at a value of $5.3 billion in December. The buyers have been in the process of getting loans to move forward with the deal, prodding AIG to extend the deadline for its completion.
Last quarter, the U.S. Federal Reserve formally designated AIG as a “systemically important financial institution,” or SIFI.
The SIFI tag means the insurer would face tighter regulations and possibly an annual stress test similar to the one that large U.S. banks must go through before raising dividends, buying back stock or executing large acquisitions.
However, AIG said the capital returns were approved without assuming the pending sale.
“A lot of people thought that ILFC had to be sold first … the capital plan was approved without the sale and that gives a lot of credence to the capital position,” BMO Capital Markets analyst Charles Sebaski told Reuters.
PROFIT BEATS ESTIMATES
AIG’s property/casualty unit posted a 16 percent rise in operating income, even as the company swung back to an underwriting loss, hurt by higher disaster losses.
The business reported a combined ratio of 102.6 percent, up from 97.3 percent in the first quarter. A ratio below 100 means that an insurer is receiving more in premiums than it is paying out in claims.
AIG is the fifth-largest property and casualty insurer in the United States with a market share of 4.52 percent, according to the National Association of Insurance Commissioners (NAIC), a multi-state insurance regulatory body.
An unexpected spike in interest rates late in the quarter helped the company’s life insurance business, which has been suffering from low rates for several years.
The business reported higher gains on the value of securities held in its investment portfolio, and returns on alternative assets rose. Its operating income increased 23 percent to $1.15 billion.
Long-term rates began rising in May after hitting near-historic lows, and in late-June rates spiked suddenly – but temporarily – after U.S. Federal Reserve Chairman Ben Bernanke indicated that the central bank may pull back from its monetary easing program earlier than expected.
AIG’s net income rose to $2.73 billion, or $1.84 per share, in the second quarter, from $2.33 billion, or $1.33 per share, a year earlier.
On an operating basis, AIG earned $1.12 per share. Analysts on average had expected earnings of 85 cents per share, according to Thomson Reuters I/B/E/S.
AIG shares, which have risen about 30 percent so far this year, closed at $47.07 on the New York Stock Exchange on Thursday. They were at a two-year high of $49.90 in trading after the bell.
AIG Property Casualty reported operating income of $1.1 billion in the second quarter of 2013, compared to operating income of $936 million in the second quarter of 2012. Underwriting performance improved in the second quarter of 201 — the accident year combined ratio, which excludes catastrophes and prior year development, declined to 96.5 from 98.3 in the second quarter of 2012.
The second quarter 2013 combined ratio was 102.6, compared to 102.4 in the second quarter of 2012. Second quarter 2013 results included catastrophe losses of $316 million and adverse net prior year development of $154 million (net of premium adjustments), primarily due to a Storm Sandy loss reserve increase of $142 million. These additional Storm Sandy losses related to a small number of existing large and complex commercial claims. The second quarter 2013 accident year loss ratio, as adjusted, improved to 61.9 compared to 64.8 in the second quarter of 2012, driven by a continued shift to higher value business, enhanced risk selection, and rate increases.
The second quarter 2013 acquisition ratio was 20.0, a 0.4 point increase compared to the second quarter of 2012. The general operating expense ratio was 14.6, a 0.7 point increase compared to the second quarter of 2012, as a result of increased personnel-related costs during the second quarter of 2013 offset by a decrease in bad debt expense and reduced costs for infrastructure projects. The general operating expense ratio was also higher due to the lower net premiums earned base.
Second quarter 2013 net premiums written of $9.3 billion increased 1.8 percent compared to the second quarter of 2012 due to pricing increases and focused growth efforts. Excluding the impact of a change in the timing of recognizing the excess of loss ceded premiums written and foreign exchange, second quarter 2013 net premiums written increased 4.0 percent compared to the second quarter of 2012.
Commercial Insurance net premiums written increased 3.6 percent compared to the second quarter of 2012. The company said the higher net premiums written were primarily due to growth in new business and pricing.
Consumer Insurance net premiums written increased 4.7 percent compared to the second quarter of 2012. Consumer Insurance continued to focus on growing higher value lines of business, while expanding direct marketing as part of its multi-channel distribution strategy.
Commercial Insurance reported second quarter 2013 operating income of $535 million and a combined ratio of 101.7, compared to operating income of $745 million and a combined ratio of 99.3 in the second quarter of 2012. The second quarter 2013 accident year loss ratio, as adjusted, improved to 62.2 from 67.3 in the second quarter of 2012, primarily due to the shift to higher value business, enhanced risk selection, and rate increases. The second quarter 2013 acquisition ratio was 16.3, a 0.9 point decrease compared to the second quarter of 2012 due to a change in business mix and insurance-related assessments. The second quarter 2013 general operating expense ratio was 12.8, a 1.4 point increase compared to the second quarter of 2012, primarily due to lower net premiums earned and increased personnel-related costs offset by a decrease in bad debt expense.
Consumer Insurance reported second quarter 2013 operating income of $91 million and a combined ratio of 100.1, compared to operating income of $192 million and a combined ratio of 97.7 in the second quarter of 2012. The second quarter 2013 accident year loss ratio, as adjusted, was 60.2 compared to 59.1 in the second quarter of 2012. The second quarter 2013 acquisition ratio was 25.9, a 2.4 point increase over the second quarter of 2012, which the company said was due to continued changes in Consumer Insurance’s business mix and investments in direct marketing. The second quarter 2013 general operating expense ratio was 15.3, a 0.3 point increase compared to the second quarter of 2012, primarily due to lower net premiums earned and increased personnel-related costs, partially offset by reduced costs for infrastructure projects.
(Additional reporting by Lauren Tara LaCapra; Editing by Maju Samuel)
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