AIG Reiterated at Neutral - Analyst Blog
January 03 2013 - 12:20PM
Zacks
We have affirmed our Neutral recommendation on American
International Group Inc. (AIG) following its modest
operating performance during the first nine months of 2012 and the
complete bailout loan repayment. However, the anticipation of fresh
regulatory and execution challenges along with severe catastrophe
losses projected in the fourth-quarter 2012 reflect limited
upside.
AIG reported third-quarter 2012 operating earnings per share of
$1.00, significantly beating the Zacks Consensus Estimate of 85
cents as well as the year-ago quarter’s loss of $1.58 per share.
Consequently, operating net income surged to $1.64 billion from a
loss of $3.0 billion in the year-ago quarter.
Most significantly, in December 2012, AIG completed the whole
repayment of the $182.3 billion government bailout loan in the U.S.
taken in September 2008. The company has no liability toward the
bailout loan, while the Treasury earned an additional $22.7 billion
from its investment and still carries warrants to buy shares worth
2.7 million in AIG in the future.
The sooner-than-expected complete liberation from the Treasury’s
stake is further expected to add to AIG’s capital flexibility and
be accretive to earnings, ROE and book value per share, while also
retaining investors’ confidence in the stock. This is also
reflected by management s intention to initiate dividends in
2013.
Moreover, AIG has successfully disposed of its redundant and
risky businesses at attractive valuations, which in turn has helped
in consistent improvement in the financial leverage along with the
reduction in interest expenses. Consistent payoffs along with the
strategically divested assets also led to an operating cash flow of
$2.84 billion at the end of September 2012, which surged from an
outflow of $1.2 billion in the prior-year period.
AIG’s unique operational focus and management discipline even
amid a challenging economic and intensely competitive environment
have helped its businesses regain composure sooner than expected.
Meanwhile, the positive pricing trends, expense control and
continued improved momentum at SunAmerica have helped in the modest
growth of retirement and variable annuity products along with
assets under management.
Furthermore, Chartis has been showcasing a steady performance
since over a year now. Both Chartis and SunAmerica are expected to
shore up the core growth and help mitigate operational risks,
making AIG financially flexible once again. AIG’s slow but steady
growth has helped it achieve the confidence of the rating
agencies.
On the other hand, despite the complete sale of the Treasury’s
stake, risk of other fresh regulatory challenges from the Federal
Reserve remains. While the asset disposals have helped the company
liberate itself of the severe debt, it has also shrivelled AIG’s
portfolio and global market share, thereby exposing AIG to intense
competition from its peer group including MetLife
Inc. (MET) and Prudential Financial Inc.
(PRU).
Moreover, higher catastrophe losses and the absence of any solid
growth catalyst pose near-term financial and operating risks. As
well, the volatile equity markets, widening credit spreads and
reduced interest rates continue to showcase declines and
persistently undermine margins. These factors also hampered the
premiums growth in SunAmerica and Chartis.
Going forward, we expect the trend to continue as earnings are
likely to be tempered by additional regulatory and operational
challenges. Any robust growth appears overly ambitious at present
although a positive turnaround in the global economy and an
improved macro scenario is likely to pave the way for significant
growth of AIG.
The Zacks Consensus Estimate pegs the company’s loss for the
fourth quarter of 2012 at 11 cents per share, which is about 113%
lower than the earnings in the year-ago quarter, owing to the
projected catastrophe losses from Hurricane Sandy of over $2.0
billion during the quarter. For 2012, however, earnings are
expected to escalate to $3.75 per share against $1.28 per share in
2011.
Currently, AIG carries a Zacks Rank #3, implying a short-term
Hold rating with no clear directional pressure on the stock.
AMER INTL GRP (AIG): Free Stock Analysis Report
METLIFE INC (MET): Free Stock Analysis Report
PRUDENTIAL FINL (PRU): Free Stock Analysis Report
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