Disappointing underwriting and investment returns resulted in American International Group Inc. reporting an operating loss of $1.3 billion for the fourth quarter of 2015, compared to operating income of $1.4 billion in the prior-year quarter.
AIG recognized a net loss of $1.8 billion for the fourth quarter of 2015, compared to net income of $655 million for the prior-year quarter.
The fourth quarter net loss was primarily due to adverse loss development and lower investments, as well as realized capital losses and restructuring costs, according to the insurer.
Full year 2015 after-tax operating income was $2.9 billion, compared to $6.6 billion for full year 2014. For the full year, net income fell more than 70 percent to $2.2 billion. Full year 2015 net income attributable to AIG was $2.2 billion compared to $7.5 billion for full year 2014.
The insurer was also unprofitable in the third quarter of last year, posting a $231 million loss as investment results worsened. It announced it would cut up to 400 senior level jobs at that time.
AIG’s closely-watched Property/Casualty segment reported a pre-tax operating loss of $2.3 billion for the fourth quarter.
The insurer has been resisting pressure from activist investors to split into three separate companies to improve returns for shareholders. Last month CEO Peter Hancock announced a new strategic plan to return $25 billion to shareholders by 2017 by streamlining operations and exiting some lines of business. This plan includes the sale of AIG Advisor Group and an IPO of up to 19.9 percent of its mortgage insurer, United Guaranty Corp.
However, two activist investors, John Paulson and Carl Icahn, who have advocated splitting AIG into three separate companies, said Hancock’s plan was not drastic enough and pressed for representation on the board of directors.
Yesterday AIG relented and announced it had agreed to have Icahn and Paulson representatives join its board.
CEO Hancock said he was pleased that the company will avoid a distracting proxy fight by welcoming them to the board. He said on a call with analysts today that the new board members will provide an “extra degree of scrutiny” but he expects to move ahead with its current strategic plan.
Hancock said he is confident that AIG’s actions in 2015 have positioned the firm to accomplish its goals set for the next two years. During 2015, AIG streamlined its management structure and narrowed its focus to profitable businesses.
“We’re working to become our clients’ most valued insurer and have a clear plan to maximize shareholder value that balances the interests of all of our stakeholders, including shareholders, debt holders, rating agencies, customers, employees, and regulators,” Hancock said.
Hancock said the company has made a “strong start” to his goal of returning $25 billion to shareholders by 2017 by returning almost $12 billion in the form of share repurchases and dividends in 2015, and purchasing another $2.5 billion of outstanding AIG common shares in February. The board yesterday authorized the repurchase of an additional $5 billion of AIG common shares and increased the quarterly dividend.
During the fourth quarter of 2015, AIG strengthened its non-life insurance loss reserves by $3.6 billion pre-tax, which represents 6 percent of AIG’s total net loss reserves. Of the $3.6 billion strengthening, $1.3 billion related to accident years 2004 and prior, and the remaining $2.3 billion resulted in an increase of approximately 0.7 points, on average, for the 2005 through 2014 accident year loss ratios. The company said three classes comprise approximately 90 percent of the total charge: U.S. and Canada casualty ($2.2 billion), U.S. and Canada financial lines ($566 million), and run-off lines ($541 million).
General operating expenses decreased 6 percent during the fourth quarter and 3 percent during the year compared to the prior-year periods.
Overall Commercial Insurance – which includes property/casualty, mortgage and institutional markets — reported a pre-tax operating loss of $2.1 billion compared to pre-tax operating income of $1.2 billion in the prior-year quarter, primarily driven by the previously announced $3.0 billion charge for adverse prior year loss reserve development in Property Casualty and lower net investment income in Property Casualty and Institutional Markets, as a result of lower returns on alternative investments. The increase in Mortgage Guaranty pre-tax operating income was due to higher underwriting income.
During the fourth quarter, AIG increased global commercial property limits to $2.5 billion per occurrence from $1.5 billion, in response to increased demand for capacity and services from clients managing complex global risks and increasing property values. This increase was the result of recent investments in engineering and analytical capabilities, which in turn allowed AIG to secure meaningful support from a panel of long-standing reinsurers.
Robert S. Schimek, executive vice president and CEO for Commercial Insurance, said the fourth quarter saw large-limit and middle market property and segments of program business continued to grow and segment also benefited from fee income from NSM, the managing general agent acquired by AIG last April.
He said overall rate change declined by nearly one point in the quarter, while U.S. casualty rates increased by three present. Rates were essentially flat in specialty and financial lines.
“We see profitable growth opportunities in multinational, financial lines, property upper middle market and major account segments that utilize our risk engineering capabilities, international casualty, and areas of emerging risk, such as cyber and M&A insurance,” said Schimek.
The Property Casualty segment within Commercial Insurance reported a pre-tax operating loss of $2.3 billion compared to pre-tax operating income of $935 million in the prior-year quarter, primarily due to higher net adverse loss reserve development, and, to a lesser extent, lower net investment income.
The Property/Casualty loss ratio was 132.9 and the combined ratio 161.5 in fourth quarter 2015; these compare to 75 and 103.4 respectively in 2014.
Catastrophe losses were more than $160 million compared to $35 million for the corresponding quarter last year.
The acquisition ratio rose to 16.6 compared to 16.0.
The segment saw higher severe losses and an increase in current accident year losses in U.S. commercial automobile liability and financial lines, although these results were partially offset by an improvement in specialty and property business.
The increase in the acquisition ratio reflected higher commission expenses in certain classes of business in property, partially offset by lower amortization of previously deferred costs.
The general operating expense ratio benefited from lower employee-related costs, partially offset by expenses of NSM Insurance Group, which was acquired in the second quarter of 2015, as well as investments in infrastructure, automation and shared services.
The increase in the loss ratio was due to the higher net adverse prior year loss reserve development and reflected loss reserve strengthening of $3.0 billion recorded in the fourth quarter of 2015, compared to $175 million in the prior-year quarter. This reserve strengthening was primarily in the long-tail classes of business, particularly U.S. excess and primary casualty and financial lines.
Net premiums written decreased 2 percent, primarily due to the strengthening of the U.S. dollar.