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Following the release of its second-quarter earnings report yesterday after the closing bell, American International Group (NYSE: AIG ) held a conference call this morning to provide some insight and clarity on the data reported. Though most investors didn't spend the extra hour listening to the call, there were plenty of comments made that give a clearer picture of what's going on within the company, and how management views challenges. Here are the top five quotes from AIG's call this morning.
1. "We are continuing to negotiate with the consortium."
On the top of most analysts' and investors' minds this week was the July 31 deadline for AIG's sale of its International Lease Finance Corp. to a consortium of Chinese financial firms. Obviously, the deadline has passed without the sale being completed, so most wonder what AIG's move will be. Both parties have the right to scrap the deal, but as CEO Robert Benmosche noted, the firm is still working through the complex transaction.
Benmosche was quick to remind listeners on the call that it is not a single buyer that AIG is working with, but a handful of different firms, creating complex problems throughout the transaction. If the money comes in, according to Benmosche, the deal will close. Otherwise, AIG is focusing on a late-2013 IPO for the aircraft-leasing business. As the deal progresses (or doesn't), AIG will provide more details.
2. "Are you nuts?"
Benmosche was describing some others' reactions to AIG's continued operation of its banking operations in order to keep the Federal Reserve active in the company's regulation. Though the banking business will now wind down, and had only presented a $1 billion business, the point of keeping the bank open was to establish the relationship with Fed regulators and develop a process that was acceptable and confirmed before new regulations were put in place under the company's new SIFI designation.
Later in the call, Benmosche went into detail about the scope of stress tests that AIG puts itself through in order to confirm that paying out a dividend, or any other type of capital disbursement, is reasonable. But at the same time, he was firm in stating that the Fed does not have approval authority over such decisions. While representatives from the Fed are often in meetings when these plans are discussed, and therefore informed, they do not have to give an OK. AIG gives more heft to the opinions of the ratings agencies, however, when making such a recommendation.
3: "No signs that the trend is changing."
Discussing the trend of declining loss ratios during the past few quarters, Executive Vice President of Property and Casualty Insurance Peter Hancock was clear that the current decline in AIG's accident year loss ratio was sure to continue. Largely due to changes in risk assessments, business mix, new loss mitigation strategies, and improving pricing, AIG has reported several quarters of consecutive accident loss ratio declines.
Hancock discussed the improved pricing in more detail later in the call, stating that a 9.4% rise in U.S. casualty insurance rates was very promising for the P&C operations. According to Hancock, there had been some softening of pricing outside the U.S., but domestic rate increases was most needed for the P&C segment.
4: Half of earned premiums [were] related to high quality business written after 2008."
Speaking about the continued gains in AIG's mortgage guaranty operations, Hancock was clear that business is booming. The firm's delinquency rate has continued to drop, and new business is underwritten with tremendous scrutiny. The firm has a 62% increase in new insurance written for domestic first-lien loans during the second quarter, with the average FICO score of 755, and an average loan-to-value of 92%. Hancock also noted that with home prices continuing to rise, the prospect for more new business development is positive.
5: "It remains our view that a moderately rising rate environment will be positive for our operating fundamentals."
Though the recent rise in interest rates did have a modestly negative impact on the insurer's investment portfolio, Executive Vice President of Life and Retirement Services Jay Wintrob noted that the company has also seen some benefits. The Life and Retirement operations had a 10% increase in assets under management for the quarter, but Wintrob noted that higher interest rates dampened that gain by corroding some value within the portfolio. But the higher rates had also spurred on a new drive for fixed annuities during the quarter. The fixed-annuity products are priced weekly by the insurer, so any future changes in interest rates can be captured.
Noted throughout the call, Wintrob and his team actively manage the products and investment portfolio to counteract any negative influence from changing rates. For investors, this should be an area of confidence in management's ability to take steps to both mitigate risks, and maximize opportunities.
Giving some context
Some investors may be happy just to see that AIG has performed well (again) during the past quarter. But for those who want to see how management will be handling challenges that the company may face in the future, this morning's conference call gave them plenty of context. Not only has the insurer boosted all segments of its operations, CEO Benmosche and his team are taking extraordinary measures in order to be prepared for what's to come.
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