By Leslie Scism
American International Group Inc. boosted its common-stock dividend by 124% and raised its share-repurchase target by $5 billion, signs of health that seemed unfathomable seven years ago when it nearly collapsed into bankruptcy.
The moves came as the global insurer posted a 5.4% increase for the second quarter in its closely watched operating profit, to $1.89 billion, handily beating Wall Street analysts' expectations.
While operating profit topped views, net income still fell 41%. The company's bottom line was up against a tough comparison with the year-earlier quarter, which had enjoyed a substantial gain tied to the sale of an aircraft-leasing business. The most-recent results included a loss in retiring some debt early, as the company continued its effort to simplify its balance sheet.
But AIG's several-year restructuring effort to improve profitability in its core business of selling property and casualty insurance to businesses faced strong headwinds in the quarter. Pricing pressures hurt some of the unit's business lines, and the strong dollar in many countries worked against revenue growth. The unit's results also were hurt as it bolstered some older claims reserves.
The 5.4% increase in AIG's overall operating profit was largely courtesy of gains in the value of AIG's remaining stake in the aircraft-leasing business, which was among businesses sold to repay U.S. taxpayers for its nearly $185 billion bailout, and an investment in a Chinese insurer, PICC Group, as well as lower corporate expenses and reduced interest payments on debt.
U.S. property-casualty insurers industrywide face overall tough conditions. Tens of billions of dollars of pension-fund money has poured into certain parts of the insurance industry over the past several years, as those funds' managers seek diversification and higher-yielding investments than bonds. That has led to price declines for some property-catastrophe coverage, while an absence of major hurricanes in the U.S. last year bolstered many insurers' capital cushions and has led to increased competition as they seek to earn a return on that capital.
A wave of mergers-and-acquisitions is now under way, with AIG rival ACE Ltd., agreeing in July to buy Chubb Corp. in the biggest property-casualty insurance deal on record at $28.3 billion.
Rather than pursuing a blockbuster deal, AIG has focused on buying back shares to shrink the large number created in the wake of the 2008 government takeover. In addition, AIG is one of three insurers that have been designated as "systemically important financial institutions" by a panel of federal regulators created under the post-financial-crisis Dodd-Frank regulatory-overhaul law, and there is uncertainty about future capital levels these insurers will be required to hold, analysts said.
At this point, AIG and two other "systemically important" insurers-- MetLife Inc. and Prudential Financial Inc.--don't have to obtain approval for dividend increases or share buybacks, as the Federal Reserve is still working on the capital rules.
This isn't to say that Fed officials are caught by surprise by any capital moves. A Fed staffer sits in on AIG's board meetings, as well as some other company sessions, a person familiar with the matter said. As of June 30, AIG had $104.3 billion of shareholders' equity.
Insurance-industry investors focus on operating earnings because it excludes realized capital gains and losses on insurers' big investment portfolios and other items considered nonrecurring on a quarterly basis.
AIG's net income fell to $1.8 billion from $3.07 billion, with lower capital gains also hurting the year-over-year comparison.
AIG's quarterly per-share operating profit rose 13% to $1.39 from $1.23. The per-share comparison was aided by a smaller share base, thanks to AIG's purchase of approximately $2.3 billion of its shares during the quarter. Analysts surveyed by Thomson Reuters expected $1.22 a share.
The quarterly dividend will rise to 28 cents from 12.5 cents. Based on the approximately 1.31 billion shares outstanding as of June 30, the increase in the dividend would send an extra $200 million or so out the door each quarter. AIG said it had bought $965 million of shares in July.
With the additional $5 billion allocation for buybacks, AIG said it has about $6.3 billion in total repurchase authorization.
Douglas Steenland, chairman of AIG's board, said in a news release that AIG's continued divestiture of noncore assets "have generated substantial cash proceeds and significantly improved our risk profile."
During the second quarter, AIG sold part of its stake in AerCap Holdings NV for total proceeds of $4.2 billion, and shares of Springleaf Financial Services, a consumer-finance firm created from another of AIG's crisis-era divestitures, for about $410 million.
During the financial crisis, AIG became a poster child of the liquidity problems that hit many financial firms with exposure to subprime mortgage bonds after the real-estate bubble burst. In bailing out AIG, U.S. taxpayers at one point owned 92% of its equity. AIG fully repaid taxpayers by the end of 2012.
In August 2013, AIG's board decided to resume paying a common-stock dividend for the first time since the crisis. MetLife and Prudential also have boosted their dividends and share-buyback activity over the past couple of years.
Results in AIG's core property-casualty unit also were hurt by higher catastrophe-related claims. Its so-called combined ratio, which is the amount of each premium dollar that goes to pay claims and related expenses, increased to 98.8 cents from 96.5 cents. Excluding the effects of foreign exchange, net premiums written increased modestly, AIG said.
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