American International (AIG) Q2 Earnings Beat, Plunge Y/Y

American International Group Inc. (NYSE:AIG) reported first-quarter 2016 operating income of 98 cents per share that surpassed the Zacks Consensus Estimate of 91 cents by 7.7%. Earnings, however, plunged 29.5% year on year.

The year-over-year underperformance was mainly attributable to an adverse change in net loss reserve discount on workers’ compensation reserves and a decline in earnings from market sensitive assets. Nonetheless, an increase in net realized capital gains partially limited the downside.

Total general operating and other expenses on GAAP basis decreased 19.5% year over year to $2.5 billion.

Segment Highlights

Commercial Insurance

Property Casualty posted a pre-tax operating income of $791 million, down 33.6% from the year-ago quarter. The underperformance was primarily due to the absence of strong alternative investment income that was available in the second quarter of 2015. Also, an underwriting loss in the reported quarter due to net loss reserve discount contributed to the downside. Higher catastrophe losses were another negative. However, improvement in accident year losses and lower net adverse prior-year loss reserve development partially offset the weakness.

The expense ratio dipped 90 bps due to a 120 bps reduction in the general operating expense ratio owing to lower employee-related costs supported by ongoing actions to streamline management structure.

Net premiums written were down 21% due to the continued improvement of risk selection strategy. The non-renewal of certain underperforming classes of business, increased use of reinsurance, and adherence to underwriting discipline in competitive market conditions also contributed to the decline.

Mortgage Guaranty recorded a 19% increase in pre-tax operating income to $187 million due to the decline in incurred losses from lower delinquency rates, higher cure rates and an increase in premiums earned from growth in policies in-force

As of Jun 30, 2016, Mortgage Guaranty reported available assets under the Private Mortgage Insurer Eligibility Requirements of $3.3 billion.

Consumer Insurance

Retirement Pre-tax operating income decreased 7.9% year over year to $741 million, primarily due to lower net investment income on alternative investments. A decrease in employee-related expenses partially limited the downside. Premiums rose 18% because of higher immediate annuity premiums in the Fixed Annuities product line. Premiums and deposits also increased to $6.4 billion backed by better business in Fixed Annuities, Retail Mutual Funds and Group Retirement.

Life pre-tax operating income rose 23% to $184 million mainly due to more favorable mortality experience and lower domestic employee-related expenses. Premiums grew 9% and premiums with deposits increased 5% year over year.

Personal Insurance pre-tax operating income came in at $179 million due to improved underwriting results. Net premiums written declined slightly due to a drop in automobile and personal property. Nevertheless, an increase in warranty service programs somewhat offset the underperformance.

Corporate and Other reported pre-tax operating loss of $544 million. The segment had delivered pre-tax operating income of $372 million in the year-ago quarter. The downside stemmed from lower earnings on Legacy investments at the parent/holding company. A net loss reserve discount charge associated with run-off insurance lines recorded in the current quarter was another headwind.

Financial Position

AIG Parent liquidity was $6.7 billion as of Jun 30, 2016.

At the end of the quarter, AIG’s book value per share (excluding AOCI and DTA and including dividend growth) increased 8.5% year over year to $61.78.

Normalized Return On Equity (excluding AOCI & DTA) increase 210 basis points from the prior-year quarter.

Share Buyback and Dividend Update

AIG returned capital worth $3.2 billion to shareholders via $2.8 billion of repurchases of AIG common stock, $90 million of warrant repurchases and $350 million as dividend payment.

From the end of second quarter through Aug 2, 2016, AIG repurchased shares worth $698 million. On Aug 2, 2016, the board of directors authorized additional share buyback $3 billion, which increased AIG’s remaining share repurchase authorization $4 billion. On the very same date, AIG’s board declared a quarterly dividend of 32 cents per share.

Zacks Rank

Currently, AIG carries a Zacks Rank #3 (Hold).

Performance of Other Multi-Line Insurers

The bottom line of CNO Financial Group (NYSE:CNO) surpassed the Zacks Consensus Estimate, while earnings of Cigna Corp. (NYSE:CI) and The Hartford Financial Services Group Inc. (NYSE:HIG) missed the same in the second quarter.