It's been a big year for American International Group (NYSE:AIG). After shaking off the remainder of its governmental ownership in the fourth quarter of last year, 2013 has been the true test of management's direction for the company and its shareholders. And so far, there's plenty for investors to celebrate. As we come to the beginning of 2013's final quarter at the end of the week, let's take a look back at the top five things AIG has done so far to boost itself and its shareholders' value.
1. Holding off
As each quarter rolled on so far in 2013, the big question from analysts and investors alike was when the insurer would begin making capital distributions in the form of dividends and share buyback plans. We had to wait eight months for management to take the plunge, but there was a definite method to CEO Robert Benmosche's madness.
In each of the first two earnings conference calls, Benmosche didn't beat around the bush about his focus for the company, or that it didn't include dividends... yet. Instead AIG was focused on reducing its debt burden, and in turn reducing its costs. During the second quarter alone, AIG reduced its debt burden by over $900 million and expect to see an annualized interest expense savings of $600 million. That savings alone covers twice the amount the company will be paying out in dividends.
2. Doubling down
AIG made a major move into China during the fourth quarter of 2012, with a $500 million investment in the PICC Group. With the returns on that investment reaching 10% after just a few months, the insurer sought to increase its exposure to the People's Republic and expanded its involvement with PICC. Though China has been in the news lately for both conflicting economic data and potential threats to its high rate of expansion, the increase in AIG's investment there is still a solid opportunity for the insurer.
Recent reports claim that China's growth rate may be falling to 6%, but that's still more than quadruple the rate at which the U.S. is expanding. Also, the country had a steadily increasing middle class that is creating a new market for both property and casualty insurance needs, as well as life and retirement solutions.
3. Hello again
The mortgage guaranty market was the business line that really got AIG in trouble during the financial crisis. So when it announced that it would be making a big push back into that segment, some investors may have had some doubts. But since its return, AIG's United Guaranty operations have reported solid operating income, with positive trends developing for both increases in new underwriting and decreases in delinquencies. In fact, the second quarter's results included the fact that half of all earned premiums for United were written after 2008.
With the housing market remaining steady, including increases in both sales and home prices, mortgage guaranty operations are a viable growth opportunity for AIG. As the FHA continues to pull back from the market, opening up space for private insurers to enter, the competition may be fierce. The private firms wrote a huge amount of new business during the second quarter, with five firms' results listed below:
|Company||Second Quarter New Business|
|AIG (United Guaranty)||$14.0 billion|
|MGIC (NYSE:MTG)||$8.0 billion|
|Genworth Financial (NYSE:GNW)||$20.1 billion|
|Radian Group (NYSE:RDN)||$13.4 billion|
|Essent Guaranty||$10.0 billion|
All of the companies listed above reported increases in new business above 30% when compared to the prior year, with both AIG and Radian reporting increases over 60%.
4. Flying high
The road toward the sale of AIG's aircraft leasing operations, International Lease Finance Corp, has been a bumpy one for the insurer. The latest news is that AIG and its prospective buyers have once again bumped out the closing date in order for the buyers to raise funds for the purchase. Though a series of previously set deadlines has already come and gone, the Chinese consortium now has until the end of September to find the cash for the $4.75 billion price tag.
In the meantime, AIG and its ILFC management team have been making the moves necessary to keep the operations up to snuff, including the recent purchase of 50 new jets. Though it may seem like the perfect time for management to take a break and avoid any big expenditures, the company is choosing to take another path -- one that will keep the operations in high demand if the current sale falls through.
Should the deal finally die, AIG has a few options: Shop around for a new buyer, or go IPO. Either one would be reasonable, with conditions better now than when the Chinese deal began, possibly setting AIG up for a better sale price, or spinning off the operations and taking them public. Since ILFC is the second largest aircraft leasing firm in the world, there's sure to be plenty of interest if AIG chose the latter option.
5. Pay up
Back to the dividends. As was mentioned in the first point, there was plenty of speculation as to when AIG would reinstate its dividend -- and how much it would be. Since announcing its $0.10 per share dividend and a $1 billion share repurchase plan, investors seem to be satisfied. But with a ton of cash on hand, couldn't the company have shelled out a bit more for investors that have held tough with it? It all comes down to the main point of management's focus: doing what's best for the long term. Let's take a look at AIG's dividend versus a competitor, Allstate (NYSE:ALL).
Allstate announced a $0.25 per share dividend when it reported second-quarter earnings:
|Cash Per Share||$31.51||$7.10|
|Earnings Per Share||$1.86||$4.68|
|Earnings Growth (YOY)||17.1%||2.60%|
Though AIG does have a tremendous advantage over Allstate in terms of cash on hand, it's clear that the rival's dividends are supported by more robust EPS. Since AIG's management has been focused on restructuring and making new investments, it's not a surprise that they would choose to keep the cash in case new opportunities arise that can help keep their earnings growth on a positive trend.
Summing it up
The main trend that can be seen in all of the great decisions AIG's managment has made so far in 2013 is simple: Choose the option that provides the highest value for the company's long-term goals and prospects. And since the year isn't over yet, it will be exciting to see where the team takes AIG from here.