Self-proclaimed "leading international insurance organization" American International Group (AIG) reported a beat on Non-GAAP core operating earnings per share of $0.20 versus an expected loss of -$0.08 for the quarter ended December 2012. This is well below the prior year EPS of $0.77 (revised) but encouraging nonetheless as Hurricane Sandy losses were recognized this quarter. Non-GAAP profit was $290 million compared to $1.5 billion a year ago.
A GAAP loss per share of -$2.68 resulted from a $4.4 billion loss on sale of non-core aircraft leasing business ILFC. The prior year EPS was an impressive $11.31. The GAAP net loss was -$3.96 billion compared to net income of $21.48 billion a year ago. The prior year included the controversial $18.58 billion tax benefit.
The ILFC non-core business sale is part of CEO Robert Benmosche's strategy to divest non-insurance legacy operations. The remaining investment in AIA was sold for a gain of $290 million. Management represents that the AIGFP portfolio of legacy derivatives has been "de-risked". The U.S. Department of the Treasury has sold their remaining stake in AIG shares.
A $500 million investment has been made in Chinese insurer PICC Group. The Board's focus is on maintaining and growing the core insurance business: property casualty, life & retirement, and mortgage guaranty. Accordingly, the volatility in financial performance should decrease AIG moves away periphery, non-core, legacy operations.
The year over year growth rate for Non-GAAP earnings per share dropped to -74% for the quarter ending December 2012. The estimate was -110%. Next quarter March 2013 is initially projected at -48% and June 2013 is -21%. Though the current operations results are encouraging, AIG is still below the prior year pace and estimated to continue below into 2013.
Net premiums earned (property & casualty) is the very center of the core business and comprises 91+% of all premiums. For the current quarter there was a decrease of -3.22% from the prior year. For next quarter March 2013, the year over year growth rate for these net premiums earned is expected to barely continue contracting at a scant -0.32%. For June 2013, this contraction is projected at a small -0.91%. This revenue stream is the central focus of CEO Benmosche's strategy and the expectations could possibly be beaten to report small year over year gains.
However, both property casualty net premiums written ($7.81 billion) and net premiums earned ($8.61 billion) were 8-quarter lows. Obviously this downtrend needs to be reversed for AIG to transform into a pure, and profitable, insurance company.
While both net premiums written and earned in the core property and casualty business have been slightly contracting recently and catastrophic losses such as Hurricane Sandy can be significant, this is not normally the quarterly driver of fluctuations in Non-GAAP earnings (loss) per share. Significant changes in net investment income (including net realized capital gains and losses) is the driver of the shorter-term bottom line results. This is more difficult to predict and not projected.
AIG is liquid with adequate capital and long-term debt has dropped to a multi-year low. Total assets are $549 billion, The asset mix had been stable, but total investments has now decreased to 69% of total assets. Investments had been ranging from 73% to 77%. Whether this will materially and negatively affect net investment income, a primary driver of quarterly earnings, is a mild uncertainty. The GAAP trailing annual return on assets crashed with the loss on sale of ILFC to +0.67% from +5.31% last quarter. GAAP operating expenses and the related ratio to net revenues is now a too high 96%.
The legacy of the AIG systemic failure continues in the background as a potential drag on the bottom line, but CEO Benmosche continues selling, and eliminating, these non-core operations. AIG has weathered the Hurricane Sandy losses, "the second largest single catastrophe event for AIG in the U.S." Investors can be encouraged by the latest AIG financial results. A long-term improvement in financial performance, though potentially volatile at times, appears probable as AIG returns to being an insurance company with adequate risk management.
My long-term outlook for AIG stock continues mildly bullish, though the first half of 2013 is projected to be slower than 2012. Year over year Non-GAAP earnings per share is estimated at a -48% contraction this next quarter ending March 2013. June 2013 is initially projected at -21%. Nonetheless, the bull bandwagon is loaded and rolling out as hedge funds have stepped in as buyers of AIG stock and financial results are encouraging compared to the dismal expectations over the years.
CEO Benmosche proclaimed "the door is closed" on the the past financial crisis and AIG is moving on. AIG has been simplified and de-risked. Accordingly, we should be able to eliminate the legacy noise and focus on core operations henceforth. Both dividends and share repurchases are a possibility in the next year or so after regulators and credit rating agencies are satisfied with financial position and performance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.