AIG Buybacks, Dividend Increase Mask Weak Results: Strene Agee

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Sterne Agee analysts John M. Nadel, Dan Farrell, and Nitin Chhabra look at AIG’s recent results and give their opinion on the performance of the company.

A new $1b buyback authorization and increase in common dividend are unlikely to overcome weak core insurance results, in our view.

AIG Reported/Core Results

American International Group Inc (NYSE:AIG) reported 4Q13 Op EPS of $1.15, above our $0.85 and consensus $0.96. At a high level, the contribution to EPS from higher than budgeted alternatives income plus the change in fair value of DIB/GCM totaled $0.50 ($0.22 from higher alternatives and $0.28 from DIB/GCM), well above our estimate of $0.03. On the other hand, the contribution to EPS from core insurance operations was a disappointing $0.65, well shy of our $0.82 estimate.

Capital Mgmt & Hold Co Liquidity

Buybacks totaled $405m in 4Q13, below expectations. That said, American International Group Inc (NYSE:AIG) authorized a new $1b buyback authorization, which results in buyback capacity of $1.4b including the $400m remaining on the old plan. Mgmt commentary on expected use of ILFC sales proceeds will be important on the conference call.

P&C Core Results Weaker Than Expected on Higher Large Loss Activity in Commercial, Higher Core Consumer Loss Ratio and Higher Expense Ratio Versus Our Forecast. AY ex cat CR was 102.0% versus 100.8% a year ago and our estimate at 95.6%. Adjusting for higher severe loss activity (3.2 pts versus 0.7 pts a year ago) and higher bad debt expenses in the year ago period (which we estimate at a 1.5 pt impact), core combined ratio was slightly higher at 98.8% versus 98.6% in the year ago period with improvement in commercial essentially offset by deterioration in consumer profitability. This compares to our estimates which assumed about 3.0 pts of core combined ratio improvement in the quarter. Core loss ratio ex large losses was about 60 bps higher than a year ago while expense ratio adjusted for bad debt expense in the year ago period was about 40 bps lower, but higher than our forecast and the trend in the first three quarters of 2013. While we expect some continued improvement in commercial segment profitability, we think the pace of improvement could moderate as pricing slows. Also, while we feel there is potential for expense ratio improvement, the pace of expense improvement thus far has fallen well short of our expectations.

More Post Friday Morning Call at 8am EST. We will formally address our 2014/15 estimates after tomorrow morning’s conference call, including mgmt commentary on the outlook for further improvements (notwithstanding weak 4Q13 results) in the AY LR, timing and size of expected expense saves following $265m severance charge included in Corporate (press reports indicate 3% workforce reduction in P&C), and outlook for capital management.

Any Important Disclosures regarding Price Target Risks, Valuation Methodology, Regulation Analyst Certification, Investment Banking, Ratings Definitions, and any potential conflicts of interest may be found by clicking on the report link below. Past performance is no guarantee of future results.
AIG Note

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