3 Key Takeaways From the American International Group Earnings Report

After several consecutive quarters of growth and financial success, American International Group (NYSE: AIG  ) once again reported substantial earnings Thursday after the market's close. Here are three of the keys to the insurance behemoth's reporting that every investor should know.

1. Ignore the headlines
On the surface, the fourth-quarter and full year results from AIG looked very similar to its previous reporting trends. With earnings topping out above analyst estimates -- earnings per share of $1.15 beat the best estimate by $0.32 -- the insurer seemed to be continuing on its track of improved efficiencies and growth.

But below the top lines of AIG's reports, there was an entirely different picture to be found. Most notably in its property and casualty division, weakness in operations lead to the deterioration of its combined ratios -- leading to worsening profitability.

Though its overall combined ratio improved significantly for its P&C segment -- down 22 points from the prior year -- after adjusting for catastrophic losses and reserves, the ratio actually worsened by two points. With the absence of large catastrophic losses, such as 2012's Hurricane Sandy, most of the insurers that have reported earnings so far have noted improved earnings, so AIG's results are not unique.

2. Investments to the rescue
After disappointing efficiency issues put a slight damper on AIG's operations, its investment portfolio really played a key role in the company's success during the fourth quarter.

Net investment income improved 16.7% during the final three months of 2013, compared to the prior year's quarter. Largely to thank was the company's continued reliance on alternative investment options that have been returning higher yields in the low interest rate environment.

Though some of its competitors noted that the increase in interest rates during the quarter negatively impact their alternative investment portfolios, AIG reported strong gains that helped offset the overall weakness in its other segments.

3. Shareholder value
Back in December, I discussed the probability of AIG increasing its quarterly dividend, with the conclusion that the company would likely refrain from that type of action in favor of other uses of its capital. Well folks, I was entirely wrong.

With a new quarterly dividend of $0.125 per share, the megainsurer is providing a 25% increase to its shareholders. This brings its forward yield to 0.99%, still far behind its competitors payouts:

Company Annualized Dividend Forward Yield Payout Ratio
AIG $0.50 0.99% 11%
Allstate (NYSE: ALL  ) $1.00 1.9% 25%
Hartford Financial (NYSE: HIG  )   $0.60 1.7% N/M
MetLife (NYSE: MET  ) $1.10 2.2% 66%

Source: Yahoo! Finance.

In addition to raising its dividend, AIG also announced an increase in its share repurchase authorization of $1 billion, bringing its total authorization to $1.4 billion. The company bought nearly $403 million in shares during the final quarter of 2013, lowering its outstanding share count by 8.3 million.

Still...
If the fourth quarter results prove anything, it's that AIG is capable of handling some weakness in its core operations and is still providing some positive overall results for its shareholders. Though the softness in its P&C operations should be a serious concern if a trend develops, one quarter's results shouldn't dissuade you from considering the insurer as a solid investment opportunity.

On to the next one
With 2013 officially over (including earnings reports) for most of the top names in insurance, the task now falls on investors to find their top picks for 2014. There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


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  • Report this Comment On February 14, 2014, at 10:09 AM, Maverick707 wrote:

    Good write-up. With AIG trading at 0.70 tangible book value I am willing to wait out any temporary operating weakness in their main P&C business. The numbers and combined ratio were not that bad. They will continue to hike the dividend and buyback shares. Trading so much below book a share buyback in this case is a smart move by management.

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