American International Group Inc. (NYSE:AIG) reported third-quarter 2016 operating income of $1.00 per share that missed the Zacks Consensus Estimate of $1.21. Earnings were, however, up 92.3% year on year.
Total general operating and other expenses decreased 8.6% year over year to $2.44 billion as the company’s cost reduction initiatives paid off. Lower employee-related expenses, rationalized employee benefits and professional fee reductions drove the improvement.
Segment Highlights
Commercial Insurance
The segment’s pre-tax operating income increased 23% year over year to $729 million, primarily reflecting the higher returns on alternative investment income and an increase in the fair market value of assets accounted for under the fair value option. These were partially offset by an increase in underwriting loss in the current quarter due to higher catastrophe losses and higher net adverse prior-year loss reserve development.
Net premiums written were down 17% year over year to $4.4 billion due to the continued improvement of the risk selection strategy. The non-renewal of certain underperforming classes of business, increased use of reinsurance, and adherence to underwriting discipline in competitive market conditions also contributed to the decline.
Consumer Insurance
Pre-tax operating income at sub-segment Retirement increased 74% year over year to $1.1 billion, primarily due to a higher net positive adjustment from the review and update of actuarial assumptions, and improved performance of alternative investments in hedge funds. Premiums grew 22% year over year to $45 million due to higher immediate annuity premiums in the Fixed Annuities product line.
Sub-segment Life reported pre-tax operating income of $98 million reversing from the year-ago operating loss of $40 million. This reversal came from lower net negative adjustment from the review and update of actuarial assumptions, higher net investment income from alternative investments in hedge funds and yield enhancements and lower domestic general operating expenses. Premiums grew 17% to $791 million, primarily led by growth in international life and health sales.
Sub-segment Personal Insurance posted pre-tax operating income of $178 million, reflecting a more than twofold increase from $62 million in the year-ago quarter on improved underwriting results. Net premiums written decreased 3% year over year to $2.92 billion due to lower contribution from the Accident and Health business.
Corporate and Other
The segment reported pre-tax operating loss of $522 million, wider than the loss of $396 million in the year-ago quarter. The downside stemmed from the $622 million loss recognition expense in Institutional Markets based on mortality experience studies that indicated increased longevity.
Financial Position
At the end of the quarter, AIG’s book value per share (excluding AOCI and DTA and including dividend growth) increased 1% year over year to $62.39.
Return on equity (ROE) was 2.1%, up 300 bps year over year, led by the active return of capital to shareholders and operating margin improvement. It also benefited from higher returns on alternative investments which exceeded return expectations.
Share Buyback and Dividend Update
Total capital returned to shareholders was $2.6 billion in the reported quarter, including $2.3 billion of share repurchases and $338 million in shareholder dividends.
On the day of the earnings release, the company’s board of directors authorized an additional increase to its previous share repurchase authorization of $3.0 billion. Also, the company declared a cash dividend 32 cents per share. The dividend is payable on Dec 22, 2016 to shareholders of record on Dec 8, 2016.
Our Take
The year-over-year improvement in results reflect the efforts taken by the company to make itself slimmer and healthier by shedding non-core business, and focusing on high return generating businesses. Its cost reduction initiatives have also borne fruit, as evident from a decline in operating expenses for the first nine months of the year.
Also, the company is delivering on its commitment to return capital to its shareholders. To this effect, it announced an increased in share buyback authorization along with the third-quarter earnings release. marking the third increase in share buyback authorization so far this year. Though the company still has a long way to go to improve its profitability, we believe the company is on the right track and is progressing well.
Currently, AIG carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Performance of Other Multi-Line Insurers
The bottom line at Lincoln National Corp. (NYSE:LNC) , CNO Financial Group (NYSE:CNO) and MetLife, Inc. (NYSE:MET) all surpassed the Zacks Consensus Estimate in the third quarter.
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LINCOLN NATL-IN (LNC): Free Stock Analysis Report
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