For the second quarter, American International Group Inc (AIG) posted a 6.3% increase in net income while it intentionally shrank the amount of insurance sold. This was all part of a plan to satisfy activist investors and to bolster returns. AIG also cut costs dramatically in order to bring down the expense ratio in its property-casualty insurance operations. This process allows AIG to follow through on a promise made in a January 26 strategy update.
Despite its valiant efforts, AIG’s operating income fell 41%. This was likely due to a sharply higher level of claims for catastrophes at a time when interest rates led to upward adjustments of certain claims reserves. At the time the interests were lower than in the year-earlier period.
The per-share operating result beat the consensus expectation of analysts. However, there will definitely be efforts to gain sight of ways that AIG can improve its sluggish performance in the stock market.
Analysts are hoping to get more detail on AIG’s promise to return at least $35 billion in share buybacks and dividends through 2017. This ambitious goal is likely to be filled partially from divestitures as well as possibly through a public offering later this year.
AIG has stated that it returned $3.2 billion of capital to stockholders during the second quarter and had purchased $698 million of common stock since the end of the quarter. Its year-to-date return of capital totals to about $7.9 billion. In a separate release, the board said that it would add $3 billion to its stock buyback plan.
Recently AIG has reported that the volume of selling casualty and property insurance to business clients decreased by 21%. This is AIG’s core area of business and was being monitored very closely. This decrease was mostly due to AIG’s choice not to renew policies in certain product lines that weren’t performing well. In addition, AIG refused to lower prices for potential buyers despite the fact that rivals were intensely competing for business.
In one year, AIG’s net income increased from $1.68 billion to $1.91 billion. To put it in terms of shares, that’s an increase from $1.32 a share to $1.68 a share. AIG recently received $928 million of gains from selling shares in PICC Property & Casualty Co. in China. In the same period of time, operating income decreased from $1.89 billion, which is $1.39 a share, to $1.11 billion, which is 98 cents a share. Analysts were predicting 93 cents a share.
In the earning release, AIG Chief Executive Peter Hancock stated that the results demonstrate a big step toward the goals set by AIG’s board in January. He also said that their confidence was high that they would hit financial targets set for 2017.
Messrs. Paulson and Icahn advocated a three-way split before they joined the board because they felt this would help AIG escape its designation as a “ systemically important institution” by federal regulators. This designation makes AIG subject to capital that is to-be-determined, as well as other rules.
Mr. Hancock still feels that a split is not in the best interest of the shareholders. In the January update, he promised to reorganize AIG’s life-insurance and property-casualty operations into nine units. He also promised to cut costs more sharply and to return more capital to shareholders and potentially sell any business that doesn’t performs suitably. There’s no telling exactly what will happen, but it looks like there’s an exciting year ahead for AIG.