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AIG profit plummets 67% on debt repayment, reserve costs

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(Bloomberg) — 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.

Workers’ comp

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.