AIG Q4 Profit Drops on Debt Repayments, Reserve Charges

By | February 13, 2015

American International Group Inc., the largest commercial insurer in the U.S. and Canada, said profit declined 67 percent on costs to pay down debt and add to reserves.

Net income fell to $655 million, or 46 cents a share in the fourth quarter, from $1.98 billion or $1.34 a year earlier, the New York-based insurer said Thursday in a statement. Operating profit, which excludes some results tied to investing and debt redemptions, was 97 cents a share, missing the $1.06 average estimate of 22 analysts surveyed by Bloomberg.

Chief Executive Officer Peter Hancock has been revamping management and working to improve results at the property/casualty operation after taking over in September. AIG has been issuing new bonds at lower interest rates to repay higher-cost debt, and took an $824 million charge tied to those efforts in the fourth quarter.

“We’ll look back and say 2014 was a transitional year and 2015 will show some operational progress,” Josh Stirling, an analyst at Sanford C. Bernstein & Co. said by phone before results were announced.

The stock lost 34 cents to $52.11 at 4:49 p.m. in New York, after results were announced. AIG advanced 9.7 percent last year, trailing the 11.4 percent gain of the Standard & Poor’s 500 Index.

The board authorized the repurchase of $2.5 billion of stock, according to the statement, after AIG bought back $4.9 billion of shares in 2014.

Book value, a measure of assets minus liabilities, rose to $77.69 per share on Dec. 31 from $77.35 three months earlier.

Debt Repayment

AIG said it issued $750 million of 4.5 percent notes due in 2044 while repurchasing about $2.8 billion in high-cost hybrid and senior notes in the fourth quarter. The company also cut debt tied to the direct investment book by $2.5 billion.

Full-year profit fell to $7.53 billion, 17 percent lower than in 2013, AIG said.

Net investment income slumped 6.1 percent to $3.97 billion in the fourth quarter as hedge-fund performance deteriorated. Those holdings contributed $86 million, down from $446 million a year earlier, AIG said in a supplemental document on its website. Private equity generated $206 million, compared with $286 million a year earlier. AIG mainly invests in bonds.

Hancock, 56, replaced Robert Benmosche as CEO and previously led AIG’s property-casualty operation. He’s focused on expanding the use of science and financial metrics to choose which risks to take on and how much to charge for them.

Following the exit of life-unit CEO Jay Wintrob, Hancock changed AIG’s structure so that one of the two main units focuses on sales to consumers, while the other serves commercial clients. Previously the split was between life insurance and property/casualty coverage. Thursday’s report is the first time that AIG is posting results using the new breakdowns.

Airplanes, Buildings

AIG’s commercial offerings include coverage for buildings, airplanes and corporate boards. Consumer lines include travel and home policies, as well as life insurance and annuities.

The commercial insurance business, run by John Doyle, posted pretax operating profit of $1.22 billion, up from $973 million a year earlier, fueled by gains at the property-casualty and mortgage guaranty operations.

The property/casualty unit contributed $935 million, a 27 percent increase. The mortgage insurance business added $171 million, compared with operating profit of $48 million a year earlier.

AIG spent $1.03 on claims and expenses for every premium dollar it took in at the commercial P/C business, compared with spending $1.09 a year earlier. Costs tied to catastrophes and severe losses fell. Investments added $1.11 billion to pretax profit at the business, down from $1.19 billion.

The company said it had to set aside an additional $227 million for claims in prior years, mainly at its environmental and financial lines businesses. That compares with costs of $48 million a year earlier. AIG also took a charge of $229 million as it reevaluated workers’ compensation policies sold in prior years.

Operating profit at Kevin Hogan’s consumer business fell 21 percent to $923 million as results slumped at the life and retirement units.

[Additional notes from AIG’s fourth quarter report and results from its property/casualty commercial and personal lines units:

Peter D. Hancock, AIG president and CEO said the fourth quarter results showed progress on expense control, ongoing investments in the businesses, and balance sheet management.

He said AIG’s diversified and balanced business mix allowed for stable total insurance profits and its strong balance sheet and continued profitability contributed to positive capital management in the fourth quarter, in the form of common stock and debt repurchases. The company continued replacing high-cost legacy debt with new issuances at lower interest rates.

“Looking back on 2014, it was a year of transition and transformation, as we took important steps toward our goal of becoming the world’s most valued insurer,” Hancock said.

AIG now reports its businesses in two segments: Commercial Insurance and Consumer Insurance. “This segmentation reinforces our focus on the ultimate client group being served, not the product being delivered, and we’ve made acquisitions and investments along these lines,” Hancock said.

The company acquired Ageas Protect late last year and agreed to acquire Laya Healthcare last month.

Hancock said during 2014 AIG made “substantial progress” on the merger integration of Fuji Fire and Marine and AIU in Japan.

Commercial Property/Casualty

Commercial Property/Casualty’s increase in pre-tax operating income is attributable to improved underwriting results, partially offset by lower net investment income, according to the company. The combined ratio decreased 5.3 points to 103.4 in the fourth quarter due to a lower loss ratio and a decrease in the general operating expense ratio. The loss ratio decreased 3.1 points to 75.0 in the fourth quarter of 2014, primarily due to lower catastrophe losses and lower discount expense for workers’ compensation reserves, partially offset by higher net adverse prior year loss reserve development compared to the prior-year quarter.

Catastrophe losses were $35 million in the fourth quarter of 2014, compared to $188 million in the fourth quarter of 2013. Net unfavorable prior year loss reserve development, including return premiums, was $227 million, primarily attributable to environmental and financial lines businesses. In the fourth quarter 2014, net reserve discount expense decreased by $93 million to $229 million, primarily due to the update to the discount rates used on workers’ compensation reserves, the annual updates of AIG’s exposure to workers’ compensation claims, including assumptions about payout patterns, medical inflation and efforts to contain claims costs.

The fourth quarter 2014 accident year loss ratio, as adjusted, decreased due to a decline in severe losses and lower current accident year losses in financial lines, partially offset by an increase in the frequency in property and specialty. The acquisition ratio remained unchanged, reflecting a continuing business mix shift to more profitable lines of business that have higher commission rates, offset by higher ceding commission on new quota share reinsurance contracts. The general operating expense ratio decreased 2.2 points to 12.4, primarily due to realignment initiatives, partially offset by increased technology-related expenses.

Reported fourth quarter 2014 net premiums written decreased three percent due to lower retention of renewal business and decreased new business reflecting continued discipline in U.S. casualty, largely offset by new business growth in financial lines and property.

Personal Lines

AIG said its Personal Insurance pre-tax operating income increased to $121 million from the prior-year quarter due to improved underwriting results, partially offset by lower net investment income. The combined ratio decreased 5.6 points to 98.7 due to improvements in the loss ratio and general operating expense ratio, partially offset by an increase in the acquisition ratio, according to the report.

The loss ratio decreased 6.6 points to 51.2, and the accident year loss ratio, as adjusted, decreased 6.1 points to 52.1, reflecting improvements across all lines of business. Further, lower catastrophe losses and higher favorable prior year loss reserve development also contributed to the lower loss ratio.

Fourth quarter 2014 personal lines net premiums written increased two percent from the prior-year quarter and continued to benefit from growth in the automobile and property lines of business, although that was partially offset by declines in certain classes of the accident and health business, the insurer said.]

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