Sometimes when investors see the initial earnings announcements from their companies, they can be a little overwhelmed by all the numbers and little context. That's where the importance of an earnings conference call really becomes clear. But other times, like this quarter's call for American International Group (NYSE:AIG), initial comments made by executives can lead to big overreactions. Below we'll parse through the comment in question, along with several others that should give you a clearer picture of how AIG is doing, and how you should view it going forward.
1. "We're not sure whether we'll get them done by 2015."
Prepare yourself for some very anticlimactic news. The big hullabaloo over AIG's Friday conference call came from CEO Robert Benmosche's statement that goals stated back in 2011 may not be achieved as planned by 2015. This included achieving a 10% return on equity, which the company is coming up short on with its reported 6.2% ROE for the third quarter.
But the big point Benmosche tried to make should make you feel a little bit better. He basically stated that the company would no longer comment on those goals as we near 2015, because doing so would appear to analysts and investors as guidance instead of just reporting comments. He also noted that the goals were truly "aspirational" at heart, without set plans for completing them that would be generally included in a true target. The insurance and financial services provider maintains focus on reaching toward those aspirational goals, but by being frank now AIG can better handle expectations if it falls short in 2015.
2. "You need to look at our progress every quarter, look at the trends every quarter, and I think you'll see a continually improving organization here."
If we do just what Benmosche asks and look at the trends of AIG's results, we can see continued improvements. The property and casualty division reported a 3% increase in new premiums written, with North American commercial business driving growth with a 5.5% increase in premiums rates. Considering that the company thinks the domestic margin is most in need of rising rates, the third quarter's results show that focus on the right market is driving results.
Life and retirement continues to prove it's a cash-generating operation, with the highest levels of sales in the company's history. Not only were retail premiums and deposits up a whopping 118% from the prior year, but demand for AIG's products boosted sales of fixed annuities to a seven-quarter high at $1.2 billion.
The white-hot mortgage guaranty business is also helping AIG to expand its presence. With more than 780,000 mortgages insured by AIG's United Guaranty, the company has almost tripled its underwriting in just two years. Coupled with a delinquency rate of just 6.4%, United Guaranty has increased its premiums earned from insurance written after 2008 to more than 50%.
3. "That's a decision we hope to make in this fourth quarter."
AIG stated that accounting considerations may begin to put pressure on a decision about the sale of its aircraft leasing operation, International Leasing Finance Corporation.Though it continues to work with a Chinese consortium on the current sales contract, AIG has been prepping for both an IPO of ILFC or a sale to other interested parties.
ILFC will not make it back onto the company's balance sheet, according to CFO David Herzog, so investors don't need to worry about any implications for the company's SIFI designation. The accounting issues will simply drive the company to continue the sale as planned, or pull the plug and choose another path toward divesting the noncore business.
4. "We had to spend to eventually see the savings."
Going back to the "aspirational" goals, Benmosche and the other executives were quick to note that the company's operations are headed in the direction they wanted to see when the goals were initially set. The company has been doing a Herculean job of reducing expenses across the board, with another $325 million in annualized interest expense being reduced in the most recent quarter alone.
The company is still investing in emerging markets, which matches up to one of the other stated goals of expansion and growth. But AIG Property Casualty CEO Peter Hancock did note that the developing platforms in three key emerging markets were moving at a slower pace than originally anticipated. Investors need to remember that the recovery that AIG has managed to date is remarkable, and that developing a strong presence in a global market is not something that can happen overnight, or even in a few years.
5. "Over the next 35 years, there will be four times the number of people over 65 than there are today."
While I believe that Benmosche's comment is on a global scale, the outlook for a growing demographic in the U.S. is very impactful for the insurer. With the Census Bureau estimating population growth in the U.S. to almost 458 million by 2050, the top demographic by age will also increase. Currently, the demographic of people aged 65 or higher represents 13% of the total population; in the near future it will grow to 20%. Since that demographic plays such an important role in AIG and other insurers' businesses, there is plenty of room to see more growth opportunities for life and retirement products.
A little bit of everything
This quarter's earnings conference call had a little bit of backtracking on stated goals, some extolling of current operational successes, and outlook for a future full of growth. While the market may have overreacted on Friday after the call, it's clear that investors have a lot more to gain from AIG's focus on what really matters.