American International Group Inc. (AIG) reported first quarter operating income of $2.03 billion or $1.30 per share, well ahead of the Zacks Consensus Estimate of a loss of 15 cents per share and earnings of $637 million or 95 cents per share in the year-ago quarter.

On a GAAP basis, AIG reported a net income of $269 million or loss of 35 cents per share as compared with $1.8 billion or $2.66 per share in the year-ago quarter. The reported quarter included $1.7 billion of pre-tax catastrophe (CAT) losses related to the Japan earthquake and tsunami, the New Zealand earthquake and Australian floods. AIG also recorded a non-cash charge for the termination of the FRBNY credit facility.

These charges were partly offset by a $1.1 billion securities valuation gain on AIA Group Ltd. and a $744 million increase in the fair value of AIG’s interest in Maiden Lane III.

In addition, the run-off operations of the capital markets portfolios earned $277 million pre-tax in the quarter compared to a loss of $86 million a year ago, primarily due to higher unrealized market valuation gains related to the super senior multi-sector credit default swap (CDS) runoff portfolio.

Although results appeared sluggish due to CAT losses and ongoing business restructuring process, stability was retained in insurance operations that drove the pro forma book value per share during the quarter. AIG’s ALICO, Nan Shan, American General Finance Inc. (AGF), AIG Star and AIG Edison are reported as discontinued operations following the sale of these units.

Business Details

AIG’s General Insurance (Chartis) business incurred an operating loss of $463 million compared to operating income of $879 million in the year-ago quarter. The loss primarily resulted from a CAT loss of $1.7 billion against $0.5 billion in the year-ago quarter.

Consequently, combined ratio deteriorated to 119.0% compared with 102.5% in the prior-year period. However, it is noteworthy that both premiums written increased 19.9% year over year to $9.2 billion on the back of improved pricing and retention coupled with increased underwriting in higher-margin and less volatile business lines.

Operating income at Domestic Life & Retirement Services (SunAmerica) came in line year over year at $1.1 billion. Assets under management (AUM) grew to $253.9 billion as of March 31, 2011, up 8% year over year. Unrealized gains totaled $4.1 billion compared with $3.3 billion as of December 31, 2010. Besides, premiums and other considerations were dramatically up 31.0% year over year at $6.2 billion, primarily driven by significant improvement in both fixed and variable annuities.

Financial Services (conducted through International Lease Finance Corp. (ILFC) and AIG Financial Products Corp (AIGFP)) recorded operating income of $319 million from a loss of $171 million in the year-ago quarter.

ILFC reported an operating income of $117 million as compared to an operating loss of $56 million in the year-ago quarter. Operating earnings from capital markets increased to $277 million from a loss of $86 million in the year-ago quarter, driven by changes in credit spreads on the valuation of derivatives. AIGFP continues to unwind portfolios.

The Other Operations reported an operating loss of $1.8 billion, compared to an income of $30 million in the year-ago period. Results reflected the final pre-tax $3.3 billion loss on the extinguishment of debt related to the full repayment and termination of the Federal Reserve Bank of New York (FRBNY) credit facility.

In addition, holdings of AIA and the sale of MetLife Inc. (MET) securities produced an income of $905 million at fair value during the quarter, reflecting a valuation gain of $1.1 billion on AIA securities offset by a loss of $157 million from the sale of MetLife securities.

The United Guaranty Corporation (UGC) reported operating income of $13 million compared with $73 million in the year-ago quarter, reflecting lower earned premiums, higher levels of newly reported delinquencies in first-lien products and lower favorable loss development. Unallocated corporate expenses of $68 million in the quarter were down from $180 million in the prior-year quarter, reflecting declining restructuring expenses.

Besides, AIG’s Direct Investment business recorded operating income of $488 million compared with $15 million in the year-ago period, primarily driven by reduced impairment losses and higher fair value gains on investments, partially offset by spreads narrowing on liabilities. The fair value on AIG’s interest in Maiden Lane III increased by $744 million compared with an increase of $751 million in the prior-year period.

As of March 31, 2011, AIG reported an operating return on equity (ROE) of 10.4% against 3.9% in the year-ago quarter. However, ROE declined to 1.3% versus 9.8% in the prior-year period. Pro forma book value per common share on AIG shareholders’ equity increased 5.5% year over year to $47.66 in the reported quarter. However, book value per common share on AIG shareholders’ equity crashed 91.5% year over year to $47.32 in the quarter.

Government Loan and Financial Update

On January 14, 2011, AIG completed its recapitalization, which included full repayment of the FRBNY Credit Facility by utilizing a portion of the proceeds from the American International Assurance Co. Ltd (AIA) and ALICO transactions, partially repaying the government’s ownership interests in special purpose vehicles that hold interests in AIA and ALICO, and exchanging preferred stock held by the U.S. Treasury and the AIG Credit Facility Trust, which will ultimately be sold to public investors.

Business Update

During the quarter, Chartis announced a cash tender offer for the 45.2% of outstanding Fuji shares that it did not already own, as well as outstanding stock acquisition rights. As a result of the offer, at March 31, 2011, Chartis owned 98.4% of the aggregate shares of Fuji. This transaction is consistent with Chartis’ strategy to diversify its portfolio of businesses while strengthening its position in the Japanese insurance market.

Chartis also announced a reorganization of its operations to more strongly focus on global commercial and consumer business. During the transition process, Chartis will continue to report financial results as Chartis U.S. and Chartis International. The new structure will be reflected in public financial filings beginning in the third quarter of 2011.

On February 1, 2011 AIG also sold Japan-based AIG Star and AIG Edison to Prudential Financial Inc. (PRU) for $4.8 billion.

On January 12, 2011, AIG agreed to sell its 97.57% stake in Nan Shan Life Insurance Co. Ltd. to Taiwan-based Ruen Chen Investment Holding Co., Ltd. for $2.16 billion in cash.

AMER INTL GRP (AIG): Free Stock Analysis Report
METLIFE INC (MET): Free Stock Analysis Report
PRUDENTIAL FINL (PRU): Free Stock Analysis Report
Zacks Investment Research