AIG: Financial Loser

NEW YORK ( TheStreet) -- Bank of America ( BAC), was the loser among the largest U.S. financial names on Friday, with shares sliding over% to close at $32.68.

The broad indexes showed 1% declines, as apprehension over next week's election outweighed the announcement by the U.S. Bureau of Labor Statistics that total U.S. nonfarm employment grew by 171,000 in October, which was way above the consensus forecast of 125,000, according to Despite the job creation, the national unemployment rate increased to 7.9% from 7.8% the previous month.

The KBW Bank Index ( I:BKX) was 1% to close at $50.09 ,with all but three of the index components showing declines for the session. The KBW Insurance Index was down over 1% to close at 125.02, as 21 out of 24 of the index components pulled back.

AIG's shares have now returned 41% year-to-date, following a 52% decline during 2011.

The shares trade for nine times the consensus 2013 earnings estimate of $3.51 a share, among analysts polled by Thomson Reuters.

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.

During the company's earnings conference call on Friday, 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." The company bought back most of the U.S. Treasury's stake of AIG common shares, and the Treasury said in September that it had fully recovered the $182 billion it had committed to stabilize AIG in 2008 and 2009.

The Treasury still holds just under 16% of AIG's common shares. Benmosche said on Friday that in addition to making the government whole on its investment in the company, there was "a combined positive return to the American taxpayers of more than $15 billion to date.

When asked about the company's plans for further deployment of excess capital, since AIG's total capital ratio was 20% as of Sept. 30, Benmosche said that "while our focus has been on share buyback up until now, our focus going forward on capital management, working closely with the Federal Reserve, which now regulates AIG as a "systemically important financial institution in terms of what we're able to do, we're going to now focus on our coverage ratio, and that's going to be looking at our debt, and our ability to cover the debt with earnings."

Despite the improved bottom line and a great reduction in catastrophic losses through the third quarter, AIG's Property Casualty unit was showing underwriting losses, as the company boosted reserves for policies underwritten in previous period. The P&C unit's third-quarter underwriting loss was $441 million, improving from $532 million in the third quarter of 2011.

The P&C combined ratio was 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.

When an analyst said that it seemed that P&C reserves were always being adjusted upward, Benmosche said "quite frankly, we at AIG are working really hard to do a bottoms-up analysis of all of our reserves, starting with the claims themselves," after which John Doyle -- AIG's CEO for Chartis Global Commerce Insurance -- said "we had a number of larger losses, about two times our average number of losses in the quarter, big fire losses in the quarter that impacted it as well," as well as "a failed satellite launch, as another example."

In further comments about capital deployment in light of Federal Reserve supervision, Benmosche said that among the company's options would be to repurchase debt and that "it's important that we focus on the operating earnings within the insurance companies and where we can do more of that, as well as deal with the actual interest expense."

In a show of confidence in just how far AIG has come since the doldrums of 2008 and 2009, CFO David Herzog said "will consider acquisitions," as well as investment in organic growth."

Sterne Agee analyst John Nadel wrote after the earnings call that the focus of AIG's management "on interest coverage vs. buybacks, which makes some sense given Fed likely to be more responsive to de-leveraging near-term," and that "a likely call" of $1.1 billion in hybrid securities in December is expected to "cause analysts to reduce buyback assumptions for 2013."

Reduced buyback assumptions would, of course, reduce forward earnings estimates.

Nadel rates AIG a "Buy," with s $40 price target, and estimates the company will earn $3.28 a share in 2013.

AIG Chart AIG data by YCharts

Interested in more on American International Group? See TheStreet Ratings' report card for this stock.


-- 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 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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