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Portfolio > Economy & Markets > Fixed Income

AIG 2Q Earnings Soar Beyond Analyst Expectations

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American International Group today reported a 27 percent increase in earnings in the second quarter of this year, compared to the same period last year, and predicted that “we are close” to paying off the government for its enormous investment in AIG starting in 2008.

The release said that AIG also believes the government will make a profit on its investment.

The growth was primarily in its critical insurance operations, and was nearly double the consensus of Wall Street analysts.

Operations at its SunAmerica domestic life insurance unit jumped 29 percent.

A key was strong growth — 51 percent — in its variable annuity business, as the company expands its distribution of this key product while its competitors reduce their aggressive marketing out of concern that it may be difficult to properly capitalize the business.

Another factor cited by AIG president and CEO Robert Benmosche in the earnings summary is that, “Every day, the people of AIG continue to make significant progress in restoring our reputation in the communities we serve; respect for the AIG name has endured among our partners and customers.”  

Its Chartis multinational property and casualty operations reported a 20 percent hike in net income.

The company said net income attributable to AIG was $2.3 billion and after-tax operating income was $1.9 billion for the quarter ended June 30, 2012, compared to net income of $1.8 billion and after-tax operating income of $1.2 billion for the second quarter of 2011.

He reiterated that in October, the SunAmerica Financial Group segment will be renamed AIG Life and Retirement, and that the property and casualty insurance operations will return to the AIG name, from Chartis.

A factor in the growth of sales of Chartis, its multinational property and casualty unit, was a stronger market and a focus on more profitable and less risky lines of pc business.

Benmosche said individual variable annuity deposits totaled $1.3 billion in the second quarter of 2012, citing “innovative product enhancements and the expansion of the SunAmerica sales organization at a time when several major variable annuity competitors have scaled back their variable annuity business.”

He said retail life insurance sales grew three percent during the second quarter of 2012 over the second quarter of 2011 as a result of a continued focus on expanding distribution. “Overall, net flows were positive despite a low interest rate environment,” Benmosche said.

AIG said the life unit, SunAmerica Financial Group, reported operating income of $933 million in the second quarter of 2012, compared to operating income of $723 million in the second quarter of 2011.

The report said second quarter 2012 results were positively affected by base spread improvement due to cash redeployment in 2011 and disciplined management of interest crediting rates, partially offset by lower income on alternative investments and lower call and tender income.

Additionally, second quarter 2011 results included a fair value loss on Maiden Lane II and an increase in estimated reserves of $100 million for death claims.

Individual fixed annuity deposits did decline substantially, Benmosche said, citing the current low interest rate environment.

Chartis, the property and casualty arm, reported operating income of $936 million in the second quarter of 2012, compared to operating income of $783 million in the second quarter of 2011.

Second quarter 2012 results included catastrophe losses of $328 million and net prior year adverse development of $117 million, which was partially offset by a favorable change in net reserve discount of $94 million. As part of AIG’s ongoing focus on capital management, Chartis paid $519 million in cash dividends to AIG Parent during the second quarter of 2012.

The second quarter 2012 combined ratio was 102.4, compared to 104.0 in the second quarter of 2011.

The second quarter 2012 accident year combined ratio, excluding catastrophes, was 98.3, compared to 97.7 in the second quarter of 2011. Improvement in the loss ratio due to lower catastrophe losses, a shift to higher value business, pricing improvements and risk selection was partially offset by higher expenses.

He said its aircraft leasing unit reported a modest profit increase, to $88 million, compared to operating income of $86 million in the second quarter of 2011. 

United Guaranty Corporation, AIG’s residential mortgage guaranty operations, reported much stronger growth and operating income of $43 million for the second quarter of 2012, compared to operating income of $12 million in the second quarter of 2011, reflecting favorable prior year development and a 17 percent decline in new delinquencies.

At the same time, AIG reported that the fair value of the ordinary shares it still owns of AIA, its Asian life insurance unit that it is spinning off, decreased $493 million during the second quarter of 2012.

But, as previously disclosed, the value of the company’s investment in Maiden Lane III, a special purpose vehicle created to hold securities it had to repurchase in exchange for credit default swaps it issued before it got into trouble in 2008, increased $1.3 billion during the second quarter of 2012.

That amount is rising as the Federal Reserve Bank of New York continues to auction off the securities held in the facility.


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