American International Group shares jumped more than 3 per cent on Friday after the world’s biggest insurance company announced plans for a $8bn share buy-back and said it would increase its dividend by 20 per cent a year indefinitely.
The moves followed an analysis of AIG’s economic capital that showed it had excess capital of $15bn to $20bn, or more than 10 per cent of its market value.
Martin Sullivan, chief executive, said the company was confident that it would continue to generate excess capital which could be returned to shareholders or used to fund growth initiatives.
“We see AIG as a growth organisation. We are well-positioned to pursue attractive growth opportunities including M&A around the world,” he said on an conference call with analysts.
The scale of AIG’s excess capital partly reflects its high level of diversification which “significantly reduces required economic capital”, he said.
Not all of this could be distributed to shareholders, partly because of regulatory requirements and partly because of the different methods used for evaluating capital by the credit rating agencies.
However, Mr Sullivan said the agencies were developing frameworks for evaluating individual companies’ economic capital modeling and the strength of their enterprise risk management practices. AIG would work with the agencies to educate them about its model.
“Hopefully, in the near to medium-term we will get more credit for what we believe is a robust model from the agencies.”
Mr Sullivan said the share buy-back programme would be funded partly by one or more issues of hybrid capital, securities that blend the characteristics of debt and equity.
He said the effect would be to replace high cost common equity with low cost hybrid equity.
“We believe active capital management will be an increasingly critical component of our strategy to increase total shareholder returns.”
The shares rose 3.2 per cent in a weak market to $69.54, valuing the company at $181bn.
On Thursday evening, AIG also reported a jump in fourth quarter earnings thanks to the absence of the previous year’s regulatory settlement, acocunting adjustments and castastrophe-related losses.
Full year net income reached $14.6bn, compared with $10.5bn in 2005.
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