AIG Earnings Preview: Slower Quarter On Deck

| About: American International (AIG)
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Self-proclaimed "leading international insurance organization" American International Group (NYSE:AIG) reports quarter ending December 2012 earnings on Thursday, February 21, after market close. CEO Robert Benmosche is expected to deliver investors a slower quarter for both GAAP and Non-GAAP earnings per share.

A small Non-GAAP loss per share of -$0.08 is expected by the analysts. This would be the first loss since the quarter ending September 2011 and can be attributed somewhat to projected larger catastrophic losses. The GAAP EPS has recently been a little higher than Non-GAAP and therefore could be a small gain. A rebound in Non-GAAP earnings per share is projected for the next quarter, the first quarter of 2013.

The year over year growth rate for Non-GAAP earnings per share is projected to plunge to -110% for the quarter ending December 2012. This is well below the 4-quarter average of +87%. Last quarter was a very encouraging +163%.

Estimated QE December 2012 Earnings per Share (Non-GAAP)

  • Analyst Estimates: -$0.08 avg, -$0.32 low, +$0.06 high, 19 analysts
  • Prior Quarter: $1.00 = -108% QoQ
  • Prior Year: $0.82 = -110% YoY

The analysts estimate Non-GAAP net premiums earned (property & casualty), which is the core business, to decrease slightly from the prior quarter and prior year. The year over year growth rate for net premiums earned is expected to continue contracting at -2.81%. The chart below is striking, projects a slowing of the contraction in net premiums earned, and could be construed to provide some hope.

However, please note, that while both net premiums written and earned in the core property and casualty business have been slightly contracting recently, this is not the quarterly driver of Non-GAAP earnings (loss) per share. Significant fluctuations in net investment income (including net realized capital gains and losses) is the driver of the shorter-term bottom line results. This is much more difficult to project and is not provided.

Estimated QE December 2012 Net Premiums Earned (Non-GAAP)

  • Analyst Estimates: $8.71B avg, $8.63B low, $8.83B high, 7 analysts
  • Prior Quarter: $8.75B = -0.48% QoQ
  • Prior Year: $8.96B = -2.81% YoY

AIG is liquid with adequate capital and reasonable debt. Total assets are $550 billion and the asset mix is stable. The GAAP trailing annual return on assets is an acceptable +5.31% and trending upwards. GAAP operating expenses and the related ratio to net revenues are reasonable and consistent.

The significant core businesses, Property & Casualty plus Life & Retirement, have been steady contributors to operating income. Aircraft Leasing operating income has decreased and is not material. Other Operations, a wild card of non-core and legacy businesses, includes mortgage guaranty, global capital markets, direct investment book, change in fair value of AIA securities, change in fair value of ML III, interest expense, and corporate expenses. This Other Operations segment, which includes the ruins of the famous financial failure and meltdown, fluctuates quarterly and can potentially make or break the financial results.

The keys for these next quarterly financial results will be 1) the fluctuation in net investment income, including to a lesser extent the net realized capital gains and losses, 2) material gains or losses in other operations, and 3) an increase in catastrophic losses resulting from events such as Hurricane Sandy. Management has represented they are managing their loss exposure to U.S. catastrophes more carefully.

I am neutral on AIG stock at pre-earnings. The legacy of the AIG systemic failure continues in the background as a potential drag on the bottom line. For existing stockholders, if AIG can pull off an upside surprise for the quarter ending December 2012, then a breakout should occur. AIG stock has been in a consolidation pattern recently. A miss would beat the stock down some, but 2013 and beyond appears promising. Therefore, my long-term outlook for AIG stock is mildly bullish though a short-term to intermediate-term correction could occur if these upcoming financial results are negative.

I will review the upcoming earnings announcement for additional information and confirmation for any other reasonable trade set-ups in 2013.

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.