Insurer American International Group Inc. reported fourth-quarter results that beat Wall Street expectations, although Chief Executive Robert Benmosche said some employee bonuses will be smaller this year because the company did not meet all of its performance targets.
But AIG’s underlying business trends – with stronger operating earnings in its life insurance business, better underwriting margins in its property and casualty business and higher investment income – helped lift operating earnings above what analysts expected.
“It looks pretty good,” Sandler O’Neill analyst Paul Newsome said of AIG’s earnings report.
“Relative to what I was looking for, the life insurance business did better than expected and some of the non-core businesses – like direct investment, and the capital markets operation, which aren’t necessarily the highest-quality earnings – also reported bigger gains than I expected.”
In after-hours trading AIG shares rose 4.2 percent, to $38.84.
Last year marked an important milestone for the insurance group, which was rescued by U.S. taxpayers in 2008 with a bailout that eventually exceeded $180 billion. The U.S. government, which took a stake in the insurer in exchange for the bailout, exited nearly its entire investment in the company in 2012.
The Treasury Department still holds warrants to purchase about 2.7 million shares, but sold the remainder of its common stock last quarter. The Federal Reserve also sold off its holdings in an AIG-bailout related vehicle in 2012.
The bailout exit lifted some uncertainty for investors and AIG replaced Apple Inc. in the fourth quarter as the hedge fund industry’s favorite stock.
AIG came under enormous public pressure to slash bonuses while taxpayers were supporting the company. As recently as last month, the watchdog office of the Treasury Department’s bailout program said the agency had approved excessive pay for executives at bailed-out companies – including AIG – even in 2012.
In a memo to employees, Benmosche called the fourth quarter a “historic” one for the company, but also said some bonuses will be smaller this year because of weak performance.
“We still have work to do, and we didn’t meet all our business goals in 2012, which will mean some short-term incentive pools will be smaller this year than last year,” he said in the memo, which was obtained by Reuters.
While the company exceeded outsiders’ expectations, AIG management might have had more aggressive performance targets internally, Newsome said. For instance, low-interest rates have been crimping life-insurance profits industry-wide for some time, leading analysts and investors to expect less from the business.
“Maybe AIG did better than Wall Street expected, but not as good as they wanted,” he said.
AIG’s life insurance business reported a 20 percent jump in after-tax operating income last quarter. AIG attributed the improvement to its efforts to “actively manage spread income.”
Its direct investment book reported after-tax operating income of $509 million, while the capital-markets operation reported $300 million in after-tax operating income. A year ago those operations reported an after-tax loss of $27 million and after-tax income of $46 million, respectively.
In property and casualty, AIG reported an after-tax operating loss of $945 million, due to the Sandy losses. However, the company cited stronger underwriting margins in the business, which Newsome said was a positive sign.
Overall, AIG posted a net loss of $4 billion, or $2.68 per share, for the period, compared with a year-earlier profit of $21.5 billion, or $11.31 per share.
On an operating basis, the company earned $290 million, or 20 cents per share. The company recorded after-tax losses of $1.3 billion in the quarter from Superstorm Sandy.
Analysts polled by Thomson Reuters I/B/E/S on average expected a loss of 8 cents per share in the quarter.
[The fourth quarter 2012 combined ratio was 125.1, compared to 107.1 in the fourth quarter of 2011. Fourth quarter 2012 results included net prior year adverse development of $116 million. The fourth quarter 2012 general operating expense ratio was 17.3, a 3.2 point increase over the fourth quarter of 2011. Over half of the increase in general operating expenses was related to investments in strategic initiatives and higher severance and other personnel costs.
Fourth quarter 2012 net premiums written of $7.8 billion were essentially unchanged compared to the fourth quarter of 2011. Commercial Insurance net premiums were flat compared to the fourth quarter of 2011. Growth in higher value products and geographies was offset by risk selection initiatives and a new reinsurance program in U.S. excess casualty. Consumer Insurance net premiums written increased 0.8 percent compared to the fourth quarter of 2011. AIG said that its Consumer Insurance continued to focus on growth strategies in its major lines of business, while expanding direct marketing as part of its multi-distribution channel approach.
Commercial Insurance reported a fourth quarter 2012 operating loss of $857 million and a combined ratio of 130.4, compared to operating income of $448 million and a combined ratio of 107.1 in the fourth quarter of 2011. The accident year loss ratio, as adjusted, improved to 66.4 from 76.9 in the fourth quarter of 2011 due primarily to the shift to higher value business and price increases. The fourth quarter 2012 general operating expense ratio was 14.0, a 2.1 point increase over the fourth quarter of 2011.
Consumer Insurance reported a fourth quarter 2012 operating loss of $286 million and a combined ratio of 111.2, compared to operating income of $131 million and a combined ratio of 98.8 in the fourth quarter of 2011. The fourth quarter 2012 accident year loss ratio, as adjusted, was 58.0, compared to 57.7 in the fourth quarter of 2011. The fourth quarter 2012 acquisition ratio was 26.9, a 3.0 point increase over the fourth quarter of 2011 due to changes in Consumer Insurance’s business mix and increased investments in direct marketing. The fourth quarter 2012 general operating expense ratio was 16.4, a 0.9 point increase over the fourth quarter of 2011.]