We have maintained our Neutral recommendation on
American International Group Inc.
) following its modest operating performance and steady bailout
loan repayment during the first half of 2012. However, the top line
remains sluggish given the lingering macro-economic concerns and
low interest rates.
AIG reported second-quarter 2012 operating earnings per share of
$1.06, outshining the Zacks Consensus Estimate of 59 cents as well
as year-ago quarter's earnings of 68 cents per share. Consequently,
operating net income surged 49.8% to $1.86 billion from $1.24
billion in the year-ago quarter.
Results reflected an improved top line along with enhanced
operating performance across segments. Moreover, a higher fair
value for Maiden Lane III LLC boosted earnings.
AIG's ongoing business restructuring process has enabled it to
focus on quality insurance and investment products and services. In
addition, lower catastrophe losses improved the combined ratio,
while stability has been retained through higher assets under
management (AUM) in SunAmerica. These factors have driven the
company's operating cash flow, book value per share and return on
equity (ROE) so far in 2012. The company has also managed to reduce
the interests held by the Treasury during the quarter, thereby
enhancing capital efficiency.
AIG has been persistently reducing the US government's $182.3
billion bailout loan amount. Excluding profits, the company repaid
$35.6 billion to the government in the first half of 2012. The
latest stock sale, early this month, reduced the Treasury's stake
in the company to 53% from 61%, while it still owns about 871.1
million shares of AIG. Currently, the company owes about $25
billion to the U.S. government.
Going forward, we believe that stability in ratings, operating
cash flow and capital position bode well for long-term growth. In
addition, business de-risking, focus on core operations and
repayment of a major chunk of debt appear beneficial for stock
buybacks and other capital deployment efforts.
On the flip side, despite the latest stock sale, the Treasury
owns more than 50% of AIG and a further decline of the Treasury's
stake could raise other fresh regulatory challenges for AIG from
the Federal Reserve, which still supervises the company.
Moreover, higher operating expenses, absence of any solid growth
catalyst and intense competition from arch-rivals such as
Prudential Financial Inc.
) pose near-term financial and operating risks. Also, 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 as well as reduced the fair value of American International
Assurance Co. Ltd (AIA).
Overall, AIG is poised to accentuate its operating and capital
leverage upon dilution of the government's stake and economic
recovery. Based on the pros and cons, the Zacks Consensus Estimate
pegs the company's earnings for the third quarter of 2012 at 68
cents per share, which is much higher than the loss of $1.58 per
share recorded in the year-ago quarter. For 2012, earnings are
expected to escalate to $4.13 per share against $1.28 per share in
Currently, AIG carries a Zacks Rank #2, implying a short-term
Buy rating, while its long-term recommendation remains Neutral.
AMER INTL GRP (AIG): Free Stock Analysis Report
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PRUDENTIAL FINL (PRU): Free Stock Analysis
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