AIG’s Q3 Profit Advances 17% to $2.17B; Property/Casualty Sales Decline

By and | November 1, 2013

American International Group Inc., the insurer that repaid a U.S. rescue last year, said third- quarter profit climbed 17 percent as underwriting margins improved at the property-casualty business.

Net income rose to $2.17 billion, or $1.46 a share, from $1.86 billion, or $1.13 a year earlier, New York-based AIG said Thursday in a statement.

Operating profit, which excludes some investing results, was 96 cents per share, matching the average estimate of 21 analysts surveyed by Bloomberg. The stock fell in extended trading as premium revenue declined at the property- casualty division.

“Our outlook for operating trends in the company’s core insurance businesses is mixed,” Jimmy Bhullar, an analyst at JPMorgan Chase & Co., wrote in a research note before results were announced. “We forecast P&C margins to expand, but at a slower rate”

AIG, led by Chief Executive Officer Robert Benmosche, is benefiting from rising stock markets and higher bond yields than a year ago. The company ended the $182.3 billion U.S. rescue in December, in part by repurchasing shares.

Benmosche, 69, is working to improve margins at the property-casualty unit and expand sales to consumers.

Premium revenue at the property-casualty division fell 3.7 percent to $8.43 billion. At the segment that sells coverage to individuals, the figure slipped 5.8 percent to $3.27 billion.

The shares declined 3.4 percent to $49.90 at 5:55 p.m. in New York, after results were announced. Benmosche’s company had rallied 46 percent this year through Thursday’s close, beating the 23 percent advance of the Standard & Poor’s 500 Index.

Underwriting Loss

While margins improved, AIG still recorded an underwriting loss of $135 million at the property-casualty division, compared with a loss of $441 million a year earlier. The insurer spent $1.02 on claims and expenses for every premium dollar in the period, compared with costs of $1.05 a year earlier.

AIG said in the filing that the International Lease Finance Corp. unit took an impairment charge of about $1.1 billion on its aircraft as higher fuel prices and the success of some competing plane models reduced their value. The impairment had no effect on the insurer’s results because the company booked a loss on plans to sell the unit that was recognized last year, AIG said in the filing.

A group of investors has missed several deadlines to purchase ILFC, after striking a deal last year to pay $4.2 billion for 80 percent of the unit. AIG had previously said it expected the deal to be completed in the second quarter.

Legal Costs

AIG said it added $260 million to reserves for legal costs tied to the financial crisis. The insurer also disclosed a probe by New York regulators about whether units it sold to MetLife Inc. previously operated in the state without a license.

The U.S. life insurance division, run by CEO Jay Wintrob, recorded operating profit of $1.14 billion, up 38 percent from a year earlier, fueled by higher deposits and climbing markets. AIG said higher sales of annuities and mutual funds contributed to an increase in premiums and deposits to $8.42 billion from $4.79 billion a year earlier.

Book value, a measure of assets minus liabilities, rose to $67.10 per share on Sept. 30 from $66.02 three months earlier. Net unrealized gains on bonds available for sale narrowed to $10.8 billion on Sept. 30 from $12.5 billion three months earlier, according to the company’s quarterly report. The figures reflect market fluctuations that aren’t counted toward earnings, and are monitored by investors and ratings firms as a gauge of financial strength.

With assistance from Marci Jacobs in New York. Editors: Dan Kraut, Dan Reichl

Editor’s Note: the following are additional commentaries from AIG regarding current pricing trends

[Peter Hancock, CEO of AIG Property Casualty, said AIG’s property/casualty results in the third quarter reflect the company’s consistent focus on underwriting improvements and targeted growth.

The latest quarter benefited from modest catastrophe losses, the ongoing shift in business mix, increasing pricing, and enhanced risk selection, he said.

Hancock said Friday morning during an earnings conference call that rate increases globally for commercial lines were 3.4 percent for the third quarter, with the North American market continuing to lead rate improvement with a 5.5 percent rate increase in the third quarter.

U.S. casualty led with a 7.3 percent rate increase for the third quarter, he said, while U.S. financial lines increased 5.8 percent and U.S. property increased 3.9 percent.

John Doyle, CEO, Global Commercial Insurances for AIG Property Casualty, added, “Casualty rates in the U.S. remain fairly strong. The property market seems to have gotten a bit more competitive. We have been observing that over the course of the last several months. But I expect the same factors driving pricing improvement in casualty in the U.S. to continue in the near future.”

AIG CEO Bob Benmosche also commented on the analytics process to understand the account quality index, the quality of clients and the quality of the risks, to segment them in a much more refined way. “We are now looking at brokers and what the broker quality index is. So we know the kind of business that is being brought to us by brokers,” he said.

“When we talk about price increases, we actually look at it by these segments, and we are going to get more refined by these segments. So we have very good retention in our best clients and very little rate increases, but we are getting pretty good retention in some of our lower quality clients, where you need the rate because of the performance of those accounts,” he said. “So it isn’t just following the market anymore.”]

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