AIG Earnings Beat, Cheap Valuation Make Us Bullish

| About: American International (AIG)
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On November 1, 2012, American International Group (NYSE:AIG) reported (pdf) performance for its third quarter, which topped analysts' consensus expectations by 12%. AIG reported a bottom line of $1 per share against consensus mean expectation of $0.88 per share. The company has shown a remarkable turnaround since 2008, when it was rescued with a massive bailout package. The Treasury Department of the US government has recouped $197.4 billion on its initial investment of $182.5 billion in the company, and is no longer the majority owner of the company.

The performance in the third quarter of the current year was an improvement on the same quarter of the previous year. The following table is a snapshot of the company's performance during the third quarter.

The company generated revenues of $17.6 billion, against $12.7 billion a year ago. This was an improvement of around 40% compared to the same period of the prior year. Benefits, claims and expense declined 11% year over year to $15 billion, which led to a bottom line of $1.86 billion, against a loss of $3.8 billion at the end of the third quarter of last year. Big gains on investment holdings of the company were a result of higher profits at the end of the third quarter.

Segmental Analysis

Commencing from the third quarter of 2012, the company changed the names of its business segments; Chartis and SunAmerica to AIG Casualty and AIG Life and Retirement segment, respectively. Both the business segments showed improvements in their performance when compared to the same quarter of the previous year.

The AIG Property and Casualty business segment posted $786 million of after tax operating income at the end of the most recent quarter, against $492 million at the end of the third quarter of the previous year. This is a 60% year over year jump in after-tax operating income, driven largely by lower catastrophe losses, improvement in underwriting and higher net investment income.

Within the segment, net premiums written witnessed a moderate surge of 0.6% year over year, to $8.7 billion, while net investment income surged 20% to $1.2 billion at the end of the third quarter of the current year. The combined ratio, which combines the expense and loss ratios, decreased 90 basis points, from 105.9% to 105%, however, it is still above 100%, which denotes a failure to earn enough premiums to cover insurance claims that the company expects in future. A combined ratio of 105 represents an underwriting loss.

The reported after-tax operating income for the AIG Life and Retirement business segment surged 75% to $826 million compared to the same quarter of the previous year. This was a result of the impact of improvement in equity market performance, consistent management of interest crediting rates and higher net investment income.

Premiums within this segment plunged 2.7% to $575 million, while policy fees surged 5% compared to the same quarter of the previous year to $691 million. Net investment income of $2.6 billion increased by over 13% from a year ago, which was a major reason for the improvement in the operating income for this segment.

Analysts' Sentiments

According to Reuters, 22 analysts cover the stock, of which 11 recommend to hold the stock, while 5 rate the stock as a buy. 6 analysts have an outperform rating, while the consensus mean price target for the stock that is currently trading at $33.3 per share is $39.16 per share.

Analysts at Bank of America Merrill Lynch have a buy rating for the stock, with a price target of $44 per share, while analysts at JPMorgan reiterated their neutral rating, with a $35 per share price target. Credit Suisse raised its price target to $35 from $31 and gave the stock a neutral rating.


AIG's stock, which has seen appreciation of over 42% in its price since the beginning of the year, is still attractively priced compared to its peers. The stock of the company trades at a 49% discount to its book value, while the stock of Prudential Financial (NYSE:PRU) trades at a 29% discount to its book value.

In conclusion, we reiterate our buy rating on the stock. The company has shown a tremendous turnaround since it was rescued, and has discounted valuations compared to its peers. We believe a focused management team will lead the company to continue this improvement in the future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Financials Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.