* 1st-quarter operating EPS $1.34 vs estimates $0.87
* P&C business reports first underwriting profit in years
* More debt buybacks, but dividend not yet reinstated
By Lauren Tara LaCapra
May 2 American International Group Inc's
property and casualty business booked its first underwriting
profit in two and a half years during the first quarter, as the
insurer wrote more premiums at higher prices and reported lower
The long-awaited turnaround in AIG's property and casualty
business helped the company beat analysts' quarterly profit
expectations on Thursday, sending its shares up 3 percent in
The unit reported a combined ratio of 97.3 percent last
quarter, the first time that ratio has dropped below 100 since
the third quarter of 2010. A combined ratio below 100 indicates
an underwriting profit, meaning an insurer is receiving more in
premiums than it is paying out in claims.
"The important thing for this quarter is that the combined
ratio improved," said Josh Stirling, an insurance analyst with
Bernstein Research. "That's the thing people will focus on: they
actually made money."
Insurers have had trouble raising prices in the property and
casualty business for some time. AIG has not reported an annual
underwriting profit there since 2007, but the first quarter
seems to have been a turning point. Travelers Companies Inc
, Chubb Corp and ACE Ltd also beat
earnings expectations last month, citing higher pricing.
AIG's property and casualty unit reported operating income
of $1.6 billion in the first quarter, up from $1 billion a year
earlier. Its first-quarter, property-and-casualty underwriting
income of $231 million compares with a $180 million underwriting
loss in the same period a year ago.
AIG's life insurance business also reported some
improvement, with higher returns on alternative assets and gains
on the value of securities held in its investment portfolio. Its
operating income rose to $1.4 billion from $1.3 billion a year
ago. But like other life insurers, the business is still
navigating a low interest-rate environment that hurts interest
income from bonds and makes it difficult to sell fixed
Overall, AIG's profit fell 35 percent to $1.98 billion, or
$1.34 per share, from $3.05 billion, or $1.71 per share a year
earlier. On an operating basis, AIG earned $1.34 per share,
compared with an average analyst estimate of 87 cents per share,
according to Thomson Reuters I/B/E/S.
The profit decline was related to lower premium income
because of special items, including foreign currency
fluctuations. Excluding those factors, net premiums rose 4
percent compared with the year-ago period. AIG also spent more
to upgrade infrastructure, technology and personnel, driving
In a memo to employees obtained by Reuters, Chief Executive
Robert Benmosche called it a "strong quarter," but said further
improvement was needed.
"Our priority this year is to improve operating fundamentals
and reduce costs," he said. "Whether this means lowering the
cost of capital, re-engineering our systems, or focusing on
business lines and geographical locations that make strategic
sense for our company, each one of us should be looking for ways
to improve efficiencies and eliminate expenses."
The March quarter was an important benchmark for AIG,
because it was the first in which the U.S. government had fully
exited all its bailout-related holdings.
The Federal Reserve and Treasury Department together offered
$182 billion in combined support for AIG stemming from the 2008
financial crisis. After years of restructuring, selling assets
and returning its government-owned stock to the public, AIG
eliminated the government's last financial interest in March
when it bought back warrants from the Treasury for about $25
DIVIDEND QUESTION LINGERS
Despite that progress, there are still some questions
hanging over AIG, including how it will be treated under its
presumed status as a "systemically important financial
institution," or SIFI, which the Federal Reserve has not yet
officially designated, and when it will be able to resume
AIG shares have risen 19 percent this year, closing at
$42.13 on Thursday. But they remain well below the company's
book value of $59.39, excluding market gains and losses.
Analysts say investors are hesitant to value AIG as richly
as other insurers because of its bailout, its volatile earnings
since 2007 and its ongoing turnaround plan.
While management is investing in some long-neglected areas
of AIG, overall it is trying to reduce costs and staff.
Benmosche also wants AIG's property and casualty business to
produce a return-on-equity of at least 10 percent and a coverage
ratio of 90 to 95 by 2015.
Some investors are also waiting for the company to reinstate
its dividend, which has been suspended since 2008. The company
has so far offered cautious guidance on that topic.
While resuming dividend payments is important to management,
AIG's first priority is getting ratings agencies and regulators
comfortable with its capital levels, executives have said.
AIG has also been using excess capital to buy back some of
its more expensive debt and its stock.
The company called $1.1 billion of junior subordinated notes
and spent $1.3 billion buying back debt during the first
quarter, which will reduce interest payments by $165 million a
year. AIG is also considering calling another $750 million in
callable hybrids in the second quarter, which would save it
another $50 million in annual interest payments.
"I would love to be able to put a dividend on the stock,"
Benmosche said in a conference call in February.
But he also noted that ratings agencies "want more time to
see us continue to evolve with the good, solid earnings that
you've seen so far."