American International Group Inc. (AIG): New Analyst Report from Zacks Equity Research - Zacks Equity Research Report
AIG's favorable financial leverage, disciplined expense management, a strong capital position, business de-risking and strong ratings led to accelerated capital deployment. Its third-quarter earnings also topped the Zacks Consensus Estimate banking on improved premiums, fees, investment income, returns from AerCap and realized gains as well as lower claims and interest expenses. Improved core growth and net flows also drove the book value per share, AUM and ROE. However, higher catastrophe losses and expenses marred the underwriting results and combined ratio in the P&C segment. Taxes increased as well. Although intense competition, volatility in interest rates and currency pose near-term financial and operating risks, AIG is poised to accentuate growth in the long run, justifying our Neutral recommendation.
Founded in 1967 and based in New York, American International Group Inc. is a holding company, which through its subsidiaries, is engaged in a range of insurance and insurance-related activities in the U.S. and abroad. The company provides insurance, financial and investment products and services to both businesses and individuals in more than 130 countries and jurisdictions. Its subsidiaries serve commercial, institutional and individual customers through a property-casualty (P&C) and life insurance and retirement services network. AIG common stock is listed on the New York Stock Exchange, as well as on the Tokyo Stock Exchange. As of Dec 31, 2012, AIG and its subsidiaries had approximately 64,000 employees.
Since the third quarter of 2012, AIG operates in three primary segments:
AIG Property and Casualty (P&C), operated through Chartis, is the general insurance segment that underwrites various business insurance products globally, including large commercial or industrial property insurance, excess liability, inland marine, environmental, workers' compensation, and excess and umbrella coverages. It also offers various specialized forms of insurance such as aviation, accident and health, equipment breakdown, directors and officers liability, difference-in-conditions, export credit and political risk, along with professional errors and omissions coverage. In addition, this segment provides commercial and consumer lines of insurance products. Beginning in the third quarter of 2010, reporting includes the results of Fuji Fire & Marine Insurance Company Limited (Fuji), a consolidated business primarily writing consumer lines in Japan. Further, the segment has been reorganized into three major global groups Commercial Insurance, Consumer Insurance and Others. The segment accounted for 58% of total revenue in 2013.
AIG Life and Retirement, operated through SunAmerica Financial Group (SunAmerica), is the domestic life insurance and retirement services segment that offers a wide range of protection products, including individual term & universal life insurance and group life & health products. Insurance-oriented products consist of individual and group life, payout annuities (including structured settlements) and single premium immediate annuities. Retirement savings products generally consist of fixed and variable annuities. Results for certain brokerage service, mutual fund, Guaranteed Investment Contracts (GIC) and other asset management activities previously reported in the Asset Management segment are now included in AIG Life and Retirement. This segment comprises SunAmerica's extended operations through Woodbury Financial Services, Service Net and People's Insurance Co. of China Ltd. (PICC Life). The segment contributed 30% to total revenue in 2013. The segment is further segregated into Retail and Institutional sub-segments.
On Nov 21, 2012, AIG announced a joint venture (JV) with PICC Life in collaboration with The People's Insurance Co. of China Ltd. (PICC Group). The JV attempts to help AIG reach out to the second-largest global economy of China. Accordingly, AIG invested $500 million in the JV by buying the H shares of PICC Group. Moreover, AIG will retain at least 75% of the $500 million shares for 5 years post PICC Group's IPO.
Apart from these two segments, AIG recognizes certain of its activities in a separate segment called Other Operations. This includes the results for the remaining operations of Aircraft Leasing operations as well as Global Capital Markets portfolios through AIG Financial Products Corp. and AIG Trading Group Inc. and their respective subsidiaries (AIGFP), Mortgage Guaranty, and Direct Investment Book (DIB) (AIG Global Real Estate Corp). Further, it includes the divested businesses that are yet to be discontinued along with the interest expense, restructuring costs, expenses of corporate staff not attributable to specific business segments (Corporate & other), expenses related to efforts to improve internal controls, corporate initiatives and certain compensation plan expenses. Additionally, the segment includes the retained interest, which represents the fair value gains or losses on the securities received from MetLife Inc. as consideration from the sale of American Life Insurance Company (ALICO). Other operations contributed 12% to total revenue in 2013.
For 2008 2011, AIG disposed of more than 40 assets worth over $65 billion, while it also divested a U.S. auto insurer, more than 50 aircrafts from its plane-leasing unit and Israeli and Canadian mortgage guarantors. In Oct 2010, the company raised $20.51 billion through the IPO of 67% or 8.08 billion shares of AIA. In Nov 2010, AIG sold off ALICO to MetLife Inc. for about $16.2 billion, while 80% of American General Finance Inc. (AGF) was purchased by Fortress Investment Group LLC. AIG Star and AIG Edison units were vended off to Prudential Financial Inc. for $4.8 billion in Feb 2011. The company also divested 97.6% of its stake in Nan Shan Life Insurance Co. Ltd. to Taiwan-based Ruen Chen Group in Aug 2011 for $2.2 billion. Consequently, these units are reported as discontinued operations post sale.
Meanwhile, AIG divested its entire stake in AIA in Dec 2012, raising about $35 billion from AIA's IPO and stake sale. In Apr 2013, AIG divested a runoff unit American Fuji Fire and Marine Insurance Co. to the subsidiary of White Mountains Insurance Group Ltd.
In May 2014, AIG divested International Lease Finance Corp. (ILFC) to AerCap Holdings NV for about $7.6 billion. This comprised gross cash of about $3.0 billion and AerCap stock worth $4.6 billion, which included 97.5 million shares priced at $47.01 on May 13.
In the past couple of years, AIG also paid off AIA special purpose vehicle (SPV) preferred interests, the FRBNY credit facility and the ALICO SPV preferred interests in full. The loans against Maiden Lane II and III investment vehicles have also been fully repaid, while the company regained its equity interest worth $6 billion in Maiden III.
In Dec 2012, AIG completed repayment of the $182.3 billion government bailout loan in the U.S. taken in Sep 2008. While the Treasury earned an additional $22.7 billion from its investment, in Mar 2013, AIG repurchased the final warrants (worth 2.7 million AIG shares) from the U.S. Treasury for $25 million. The company has no liability toward the bailout loan now.
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