AIG Ready to Shop for Acquisitions (Update 1)

Updated with additional conference call comments from AIG executives.

NEW YORK ( TheStreet) -- American International Group ( AIG) has plenty of capital to deploy, and not only through share buybacks.

Speaking during the company's third-quarter earnings conference call, AIG CEO Robert Benmosche said "so for the year we've been able to buy back $13 billion of our shares, $8 billion just in this quarter alone."

AIG CFO David Herzog said that the company's total capital ratio was 20%, and that "we remain committed to our goal of $25 to $30 million in capital management by 2015," and that the company is "roughly halfway there at this point."

Herzog also said that "we've described capital management to include more than just share buyback and this is a good time to remind you that we will consider acquisitions, investment in organic growth, debt capital management, and certainly maintaining strong capital at our operating companies."

When asked to provide additional "color" on the financial effect of Hurricane Sandy, Benmosche said "we're just going through this on a claim by claim basis," and that "it's hard for me to give you a scope of it because of some of the flooding and water damage that was done especially in the New York area, in Manhattan." He added that "we don't see this as being any kind of a huge issue for us financially other than just dealing with the issues at hand.

AIG EVP for General Insurance Peter Hancock said that "usually we get about 80% of our claims notices within about 90 days, so we're obviously at the very beginning of that whole process," and that "property damage comes in quicker than the business interruption and that we're looking at a broad range of commercial properties across sectors in the affected areas. It's a big, broad area and we're getting new information every day.

AIG late on Thursday reported third-quarter after-tax operating income of $1.6 billion, or $1.00 a share, beating the consensus estimate of 86 cents, among analysts polled by Thomson Reuters. Earnings improved from an after-tax operating loss of $3.0 billion, or $1.58 a share, in the third quarter of 2011.

Despite the improved bottom-line result, AIG's Property Casualty division continued to show an underwriting loss, with a combined ratio of 105.0 during the third quarter, improving from 105.9 a year earlier. The combined ratio is the sum of incurred losses and expenses divided by earned premiums. It measures underwriting profitability, and a combined ratio of over 100% indicates an underwriting loss.

The Property Casualty unit's third-quarter underwriting loss was $441 million, improving from $532 million in the third quarter of 2011. The unit's overall performance improved, with third-quarter pre-tax income of $949 million, compared to $551 a year earlier, as net investment income increased 20% year-over-year, to $1.2 billion.

The company's third-quarter return on equity (ROE) was 7.0%.

Benmosche said on Thursday that AIG had repurchased $13 billion in common shares year-to-date, as the government reduced its stake in the company. "during the quarter, we achieved the important milestone of making America whole on the $182 billion support provided to AIG during the crisis, plus a combined positive return to the American taxpayers of more than $15 billion to date," he said.

Following the earnings release late on Thursday, KBW analyst Cliff Gallant reiterated his neutral rating on AIG, but raised his price target for the shares to $34 from $31, "in recognition of AIG's increase in book value during 2012." The company's book value per common share was $68.87 as of Sept. 30, increasing from $42.60 a year earlier.

Gallant said that "while EPS were better than expected, the strength was in the non-core Other segment, while the ongoing insurance and aircraft leasing businesses were less profitable than expected." For the Property Casualty unit, earnings came in below Gallant's $957 million estimate, and the analyst said that the property and casualty combined ratio was "disappointing given the strong results reported by peers for 3Q12."

For Allstate ( ALL), the third-quarter P&C combined ratio improved to 90.2 from 104.8 in the third quarter of 2011, while the third-quarter underwriting profit was$659 million, compared to an underwriting loss of $309 million a year earlier.

For Travelers Group ( TRV), there was similar improvement, with the third-quarter combined ratio declining to 90.3% from 104.5% in the third quarter of 2011, and a third-quarter underwriting gain of $514 million, compared to an underwriting loss of $289 million a year earlier.

Gallant cut his 2013 earnings estimate for AIG by a nickel to $4.50 a share, factoring-in a "a rough initial estimate of Sandy losses of $400m, based upon market share data," while keeping his 2013 EPS estimate at $3.45.

The analyst said that "while AIG has executed a remarkable turnaround since 2008, we view that the next step of improving long-term ROE will be a difficult challenge. Given our concerns around ROE and also the quality of reserves, we remain cautious."

Bank of America Merrill Lynch analyst Jay Cohen rates AIG a "Buy," with a price objective of $44, and on Friday raised his 2012 EPS estimate to $4.65 $4.40, "due to the upside surprise in the 3Q," while lowering his 2013 EPS estimate by a dime to $3.60, in part because of an increase in estimate expenses.

Cohen said that "the P/C business did make progress in improving its underlying loss ratio, but the reported results missed our forecast partly due to $145 million of net adverse reserve development, a disappointing drag, but one that seems to represent relatively modest adjustments to AIG's reserves rather than a signal of a larger problem."

Cohen said that "we see AIG as a classic value idea given a sizeable discounted valuation relative to peers, low expectations and sentiment on the shares that we would describe as quite cautious," and added that "a focused management team, greatly improved risk management, a global P/C platform and a diversified earnings stream provide the fuel for potential gains."

AIG's shares closed at $35.20 Thursday, returning 52% year-to-date. The shares trade for 10 times the consensus 2013 EPS estimate of $3.49.

The shares were down 5% in early trading, to $33.43.

AIG Chart AIG data by YCharts

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-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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