WASHINGTON — American International Group shares jumped Wednesday in response to higher than expected second quarter earnings as the company reshapes itself under intense pressure from institutional investors.
“We’re in the second quarter of an eight quarter journey to return the company to a level of profitability, which we feel is compelling,” Peter Hancock, president and CEO, said as AIG ended its conference call with investors. “And we want to do so while investing in talent and technology for the long term, so that we remain relevant to our clients as the world around us changes rapidly.”
He called the results “measured progress.”
“I’m pleased with the results,” Hancock said, adding that “we still have a long way to go and I think we got to stay very, very focused on execution.”
The company reported a 6% increase in its life insurance operations, with growth led by fixed annuities, retail mutual funds and group retirement products.
Fixed Annuity sales rose significantly from the low levels in the prior-year quarter although sales and net flows declined sequentially reflecting lower interest rates during the quarter as well as a more competitive market environment.
Variable annuity sales declined. Kevin Hogan, executive vice president and CEO of AIG’s consumer unit, said variable annuity sales for life insurers in general “are being pressured due to volatile equity markets and uncertainty about the Department of Labor fiduciary rule.”
Hogan said AIG is “confident” it will be prepared in time for implementation of the DOL rule. Hogan said is discussing with its distributors partners “as they determine their chosen paths for implementation, which we will in turn support.”
He said the combination of its leading market positions across annuity product lines and its multichannel distribution network positions AIG “well to respond to various market conditions and regulatory landscapes.”
Improvements in PC Business Drive Higher Earnings
A key to higher earnings was through reducing risk in the property and casualty portfolio as well as an 11% cut in operating expenses compared to last year.
Shares rose to $58.02, up $3.88 or 7.17% near the market close Wednesday following the release of earnings after the market closed Tuesday. The Tuesday close was $54.14.
AIG said that its second quarter earnings were $1.1 billion, or $0.98 per share, beating the consensus estimate of $0.93 by five cents. However, part of that gain stemmed from the reduced risk in its PC business. Last year’s comparison was $1.9 billion, or $1.39 a share.
Seeking Alpha said results were hurt by an increase in reserves on workers compensation insurance of $0.36 a share, and by a decline in so-called “market sensitive assets,” which analysts though might be from the continuing problem of poorly performing hedge fund investments. That cost $0.44 a share, Seeking Alpha analysts said.
AIG also authorized another $3 billion in share buybacks In the first six months of the year. The increase raised stock repurchase authorization to about $4 billion, analysts said.
Part of that cost reduction stemmed from a wholesale shift in distribution from in-house to independent producers.
Hogan said that with the sale of the AIG Advisor Group during the second quarter, “nearly 100% of our retail variable annuity sales will be from third-party independent distribution.”
He also noted that earlier in the year AIG substantially reduced its life career distribution channel, with independent distributors accounting for more than 80% of AIG’s U.S. life sales.
“At this time, our main proprietary distribution channels are our valid financial advisors who play a key role in serving our group retirement plan sponsors and participants and our direct-to-consumer business, AIG Direct,” Hogan said.
He justified the change by saying that increasing independent distribution “reduces our fixed cost burden and enables us to change emphasis in product sales according to opportunity, as we maintain pricing discipline.
“Across our businesses, we are constantly looking for new opportunities to reduce costs and variabilize expenses,” Hogan said.
Thomas Gallagher of Evercore said results in the fixed annuity segment of the business was $262 million, compared with an expected $255 million. Retirement income products exceed expectations, but group retirement results were lower, Gallagher said.
AIG is acting amidst pressure from activist investors such as Carl Icahn. It has shed high-end jobs, shrunk its sales to reduce risk, and has promised investors $25 billion in dividends and share buybacks through 2017.
AIG has told analysts and investors that some of that money will come from sale of is mortgage insurance unit, United Guaranty.