Insurance giant American International Group (AIG +0.96%) 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.
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.
