AIG Leads Financials as Investors Digest Q4 and Dividend

NEW YORK (TheStreet) -- American International Group (AIG) was the winner on Tuesday among large-cap U.S. financial firms, with shares rising 2.4% to close at $50.17.

The broad indices ended mixed, after another huge merger deal was announced.  Actavis agreed to to acquire Forest Laboratories (FRX) for about $25 billion in stock and cash.  Shares of Forest Laboratories were up 27.5% to close at $91.04. Shares of Greenhill & Co., (GHL) rose 8.7% to $52.87, after the the announcement it had acted as Actavis' advisor for the transaction.   The deal Actavis/Forest Laboratories deal follows last week's blockbuster $45 billion all-stock merger deal announced by Comcast (CMCSA) and Time Warner Cable (TWC). 

The KBW Bank Index (I:BKX) pulled back slightly to 68.73, while the KBW Insurance Index was up 0.7% to 185.39.

Economic news on Tuesday was mostly negative.  The NAHB/Wells Fargo National Housing Market Index fell to a preliminary reading of 46 for February from 56 in January. The February reading is the lowest since May of last year, when the index was at 44. The national Association of Home Builders in a press release said that the February reading was "the largest in the 30 year history of the index. The next largest monthly drop was October 2001 at 9 points." An index reading below 50 indicates that more builders rate the market poor rather than good.

The NAHB attributed the February decline to severe weather, as well as shortages of labor and available building lots. "As shortages become more severe, builders are faced with the possibilities that they will not be able to build up their exceptionally low inventories in anticipation of the spring selling season," the NAHB said.

Difficulties in maintaining the pace of construction, combined with a recent decline in long-term interest rates, despite the continued tapering of bond purchases by the Federal Reserve, could lead to upward pressure on prices of existing homes, or a rebound of home refinancing activity. The long-term outlook for higher interest rates and continued increases in home prices, may spur some consumers to hasten decisions to make a purchase or to refinance.

Freddie Mac (FMCC) vice president and chief economist Frank Nothaft said the following while summarizing the condition of the housing market in a press release on Tuesday.

It appears mortgage rates may have given the market a reprieve for a month or so and provided some borrowers another chance at refinancing, especially those folks that may be holding older mortgages. However, if rates continue their upward trend, it will be difficult for many families to purchase a home without seeing some income growth. Rising home prices and interest rates along with little to no income growth has resulted in a substantial erosion of homebuyer affordability over the past year. Therefore, jobs and income growth are necessary for 2014 to turn in another gold-medal performance for the housing recovery.

In other economic news, the Federal Reserve Bank of New York said the Empire State manufacturing index for February fell by 8 points from January to 4.5, which was way below the average index reading of 9.1, among economists polled by Thomson Reuters. He January reading of 12.5 was the highest reading in over a year. An index reading above zero indicates expansion.

The results of the New York Fed's February survey of New York manufacturers also showed a decline in the new order index to "about zero," with orders flat from January, while the shipment index was down 13 points to 2.1.

On a brighter note, the New York Fed's manufacturing indices looking out six months looked good. "The index for expected general business conditions rose to 39.0, and the index for future new orders climbed six points to 45.3, its highest level in two years," the bank said.


American International Group

AIG following Thursday's market close reported fourth-quarter after-tax operating income of $1.704 billion, or $1.15 a share, increasing from $290 million, or 20 cents a share, in the fourth quarter of 2012, when the company's results included a $4.4 billion write-down on AIG's planned sale of its International Lease Finance Corp. (ILFC) subsidiary.

The company's second attempt to sell ILFC, this time to AerCap Holdings (AER), is expected to be completed during the second quarter and is expected to result in a "net cash benefit" of $2.4 billion for AIG, along with a 46% stake in AerCap common shares.

Fourth-quarter highlights for AIG included further improvement in its property and casualty underwriting business.  The P&C unit earned $1.090 billion on a pretax operating basis during the fourth quarter, improving from a loss of $944 million a year earlier, when the company saw a spike in losses from "Storm Sandy," which hit the Northeast.  P&C underwriting losses declined to $330 million during the fourth quarter from $2.161 billion a year earlier, while the unit's net investment income rose 17% year-over-year to $1.42 billion in the fourth quarter.

The investment income provided the Property Casualty unit's profit, as the unit's combined ratio -- claims and expenses as a percentage of earned revenue -- was 103.8% during the fourth quarter.  That was a major improvement from a combined ratio of 125.1% during the fourth quarter of 2012, but the ratio needs to be below 100% for underwriting profitability.

AIG on Thursday announced a new authorization to repurchase up to $1 billion in common shares, bringing its total remaining buyback authorization to $1.4 billion. The company bought back about $600 million in common shares during 2013, lowering its weighted average share count for the year by 14%.

Also on Thursday, AIG said it would raise its quarterly dividend on common shares to 12.5 cents from 10 cents.

KBW analyst Meyer Shields on Sunday reiterated his "market perform" rating for AIG, with a price target of $54.00.  "AIG trades at 71% of its current $68.62 book value per share - a discount to its specialty insurer peers, but on a metric that we think is both obvious and with limited predictive power. We think the 10.1x 2015E EPS valuation fairly balances the core units' improving earnings against the risks of persistent investment yield pressure and uncertain rate and loss reserve adequacy should loss cost inflation
accelerate," Shields wrote in a note to clients.

He estimates AIG will earn $4.25 a share this year, with EPS growing to $4.85 in 2015.

This chart shows the performance of AIG's stock against the S&P 500 over the past five years:

AIG ChartAIG data by YCharts

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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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