American International Group Inc. earned a larger-than-expected profit during the third quarter, due in part to big gains on its investment holdings.
Questions about the sustainability of those profits, and uncertainty about the timing and structure of the U.S. Treasury Department selling its remaining 16 percent stake in the insurance giant, contributed to a drop in AIG shares in after-hours trading, analysts said.
“One of the biggest questions that people ask is the timing of the next offering of the U.S. government and whether AIG will participate in that offering,” said Paul Newsome, an analyst who covers the firm for Sandler O’Neill Partners.
AIG had received $182.5 billion in bailout money from U.S. taxpayers at the height of the financial crisis, and has been working to repay the government for the past few years.
The remaining stake pertains to AIG shares the Treasury Department owns in exchange for capital it infused. Last quarter, the Treasury Department sold $26.5 billion worth of AIG shares, including approximately $8 billion purchased by AIG.
The government still holds 234.2 million common shares. The timing of future sales, and whether AIG will repurchase stock, is unclear.
AIG reported an overall profit of $1.9 billion, or $1.13 per share, for the period, compared with a loss of nearly $3 billion, or $2.10 per share, in the year-ago quarter.
Analysts had expected AIG to earn 86 cents per share, on average, according to Thomson Reuters I/B/E/S.
Because competitors like Travelers Cos. Inc. reported even stronger third-quarter results, it may have set investors’ expectations even higher for AIG than what analyst figures suggest, Newsome said.
AIG shares fell 2 percent after it reported results. The stock had closed at $35.20 on the New York Stock Exchange.
Combined net investment income from AIG’s property-casualty and life and retirement divisions rose 15 percent, contributing $505 million to earnings. AIG’s sale of certain securities, including a stake in former subsidiary AIA Group Ltd., as well as higher values of bond holdings, contributed to those profits.
In AIG’s property-casualty division, net premium earnings fell 3.2 percent during the quarter. Pricing improved, but AIG has been limiting risk-taking in the business, the company said.
In its life and retirement division , premiums declined 2.7 percent. Policy fees climbed 5 percent, but low interest rates and costs related to a regulatory probe into death benefits claims also weighed on that business.
AIG’s other business, aircraft leasing, also reported a small operating profit, compared with a large loss a year ago. Chief Executive Robert Benmosche, in an interview with CNBC, said he was still waiting for markets to improve before trying to take that business, ILFC Holdings, public.
It was too early for AIG to provide an estimate of how Hurricane Sandy will affect the insurance company’s future results, Benmosche said in a statement. AIG’s headquarters in Lower Manhattan was affected by the storm, and remains closed because of a power outage.
[AIG PROPERTY CASUALTY RESULTS
AIG Property Casualty reported operating income of $786 million in the third quarter of 2012, compared to $492 million in the third quarter of 2011, reflecting lower catastrophe losses, higher net investment income due to positive marks on recently acquired structured securities, and underwriting improvements. AIG Property Casualty said it focused on risk selection, while benefiting from improving pricing trends.
The third quarter 2012 combined ratio was 105.0, compared to 105.9 in the third quarter of 2011. Third quarter 2012 net premiums written of $8.7 billion increased 0.6 percent compared to the third quarter of 2011, or 2.4 percent.
Commercial Insurance premiums decreased 0.2 percent compared to the third quarter of 2011, which the insurer said was due to initiatives to improve risk selection, particularly in U.S. casualty. Consumer Insurance premiums increased 6.2 percent compared to the third quarter of 2011. Consumer Insurance continued to emphasize direct marketing as part of its multiple distribution channel capabilities.
Commercial Insurance reported third quarter 2012 operating income of $321 million and a combined ratio of 107.1, compared to operating income of $405 million and a combined ratio of 107.2 in the third quarter of 2011. The accident year loss ratio, as adjusted, improved to 71.7 from 74.2 in the third quarter of 2011 due to the shift to higher value business and price increases. The third quarter 2012 expense ratio was 27.8, a 3.5 point increase over the third quarter of 2011.
Consumer Insurance reported third quarter 2012 operating income of $152 million and a combined ratio of 98.8, compared to operating income of $21 million and a combined ratio of 102.0 in the third quarter of 2011. The accident year loss ratio, as adjusted, improved to 57.7 from 58.9 in the third quarter of 2011 due to the shift to higher value business and price increases. The third quarter 2012 expense ratio was 40.5, a 1.8 point increase over the third quarter of 2011.