Don't Let Analysts Steer You Wrong on American International Group Inc

Headlines say one thing, the numbers say another.

May 11, 2014 at 10:00AM

Insurance giant American International Group (NYSE:AIG) released its first-quarter earnings after the market closed Monday. A surprise "miss," and some other wonky items have analysts mixed, but investors should be as confident as ever.

The billion-dollar miss
One of the first reports of AIG's earnings was quick to highlight a $1.12 billion miss on revenue expectations. Even with the huge EPS-estimate beat -- by $0.15 -- investors had to weigh which factor mattered more, the top or bottom line.

Yes, revenues have been trending flat -- or downward -- since the fourth quarter of 2012, but this isn't the entire story:

What this chart clearly shows is the effect of new efficiencies within AIG. Though the company isn't generating more revenue -- whether through stricter underwriting or a down market -- the operations are able to produce continually higher operating income through streamlined processes and margins management.

One of the best examples of the company's ability to see more value flow through to the bottom line is its mortgage guaranty operations. Though new insurance written fell 27% compared to the first quarter of 2013, United Guaranty still reported an 85% gain in operating income during the same time period, thanks to better underwriting, investment income, and continued declines in old business.

For the Property & Casualty segment, a 4% decline in premiums earned and a 5% decline in investment income weren't enough to dampen the quarter, as AIG reported its second-best results out of the past 12 quarters for operating income in P&C 

Still growing
Despite the negative revenue picture on the surface, investors can be confident that AIG's insurance operations are not stagnant or receding. Excluding unfavorable impacts from foreign exchange, both the commercial and consumer lines for P&C insurance experienced growth during the first quarter versus 2013. 

Life & Retirement is really where AIG's insurance operations took off during the first quarter. New premiums and deposits grew to $7.1 billion, a 28% jump from the first three months of 2013. Thanks to its retail products and higher interest rates, the segment's fixed-annuities products reported another record quarter of sales.

Assets under management grew another 9% during the quarter with help from improvements in fee generation and better spread management. The new flow and fee generation has helped the company offset some continued weakness in investment income, though alternative investment returns continue to support the portfolio.

Benmosche

CEO Robert Benmosche. Source: AIG website

Other complaints
The company used more than half of its share repurchase authorization to buyback 17.4 million shares for $867 million during the first quarter. And with another $537 million left of the authorization, the share price's 25%+ discount versus book value looks really attractive to analysts and investors alike.

But when asked if AIG would use the anticipated $2.4 billion in proceeds from its sale of ILFC to AerCap expected to close during the second quarter, CEO Robert Benmosche and CFO David Herzog were quick to say that only time will tell.

Analysts may think this cash would be best suited for buybacks, but the insurer has proven that strengthening its balance sheet comes in several forms.

Besides the share repurchase, another big expenditure AIG made during the first quarter was a $2.2 billion extinguishing of debt for the company's Direct Investment Book. The closure of several series of notes is a big win for the company, which continues to look for ways to reduce interest expense and boost its bottom line.

Missed the point?
Analysts can always be trusted to highlight the misses, often sensationalizing the issue. But if you take a deeper look at AIG's first-quarter earnings release, you can see that another solid quarter of core insurance operations has been logged in the books. Though some segments continue to be challenged, there are serious inroads being laid toward growth and gains.

Warren Buffett just bought nearly 9 million shares of this company
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour. (That's almost as much as the average American makes in a year!) And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has over 50% market share. Just click HERE to discover more about this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!

Jessica Alling has no position in any stocks mentioned. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: long January 2016 $30 calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers