We have affirmed our Neutral recommendation on
American International Group Inc.
) 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
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
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
Prudential Financial Inc.
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
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
METLIFE INC (MET): Free Stock Analysis Report
PRUDENTIAL FINL (PRU): Free Stock Analysis
To read this article on Zacks.com click here.