AIG: 'Change in Tone' Loser

NEW YORK ( TheStreet) - American International Group ( AIG) was the loser among major U.S. financial names on Friday, with shares sliding 6.5% to close at $48.32.

AIG late on Thursday reported third-quarter after-tax operating earnings of $1.421 billion, or 96 cents a share, declining from $1.621 billion, or 99 cents a share, during the third quarter of 2012. The company's third-quarter EPS matched the consensus estimate among analysts polled by Thomson Reuters.

Despite the large year-over-year decline in after-tax operating earnings, AIG's earnings-per-share were down only slightly because of buybacks that reduced the count of common shares to a weighted average of 1.475 billion in the third quarter from 1.643 billion during the year-earlier quarter.

AIG's pre-tax operating income declined by 32% year-over-year to $1.709 billion in the third quarter, mainly reflecting extraordinary gains in the third quarter of 2012 of $527 million on the partial sale of AIA Group, and $330 million in gains on Maiden Lane III.

Maiden Lane III was set up in 2008 by the U.S. Treasury and the Federal Reserve to purchase heavily discounted AIG credit default swaps as part of AIG's bailout by the federal government. The Fed sold the last of Maiden Lane III's portfolio in August 2012. AIG's bailout came to an end in December 2012, when the Treasury sold its last holdings of AIG shares and said "the overall positive return on the Federal Reserve and Treasury's combined $182 billion commitment to stabilize AIG during the financial crisis is now $22.7 billion."

AIG reported a 38% year-over-year increase in pre-tax operating income within its Life and Retirement business to $1.144 billion, with significant increases in premiums and policy fees partially offset by a small decline in investment income. "Other income" within the Life and Retirement unit was up 39% year-over-year to $443 million. The Life and Retirement unit's improvement also reflected "positive adjustments netting to $118 million related to a review of estimated gross profit assumptions," according to the company.

The company reported improved results in its Property Casualty (P&C) insurance unit, with an underwriting loss of $135 million during the third quarter, compared to an underwriting loss of $441 million during the third quarter of 2012. The P&C combined ratio improved to 101.6% during the third quarter from 105.0% a year earlier.

The combined ratio is an insurer's claims and expenses divided by its earned premiums. A ratio below 100% indicates an underwriting profit.

Investors were no doubt discouraged to see AIG book another P&C operating loss, while major insurance competitors have been running their P&C operations at a profit.

Allstate ( ALL), on Thursday reported underwriting income in its Property-Liability unit of $1.424 billion for the first three quarters of 2013, increasing from $1.316 billion during the first three quarters of 2012. The unit's combined ratio was 93.1% for the first three quarters, improving from 93.4% a year earlier.

AIG has been a major recovery story, and some of Friday's action probably reflected the huge 47% year-to-date return for the shares through Thursdays market close.

Drexel Hamilton analyst Gloria Vogel early Friday downgraded AIG to a "hold" rating from a "buy" rating, while lowering her EPS estimates for the company slightly to $4.54 for 2013 and $4.41 for 2014. Vogel's rating cut reflected her disappointed by "slow revenue growth, delays in the ILFC sale," and a relatively small $192 billion in common share buybacks during the third quarter.

AIG CEO Robert Benmosche during the company's earnings conference call on Friday referred to a set of "aspirational goals" set in 2011. W e are not sure whether we will get them done by 2015," he said. Benmosche also said the company would "stop making comments" on progress toward its goals. One of AIG's previous stated aspirational goals has been to improve its P&C combined ratio of 90% to 95% by 2015.

Sterne Agee analyst John Nadel in a note to clients following the conference call wrote that it was clear AIG's management had struck a different tone from previous quarters and that the company's confidence in achieving its goals was "clearly lower."

Nadel has a neutral rating on AIG, with a $50 price target.

AIG Chart AIG data by YCharts

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

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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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