By Leslie Scism
American International Group Inc., the big insurer that
received--and repaid--one of the biggest bailout packages of the
financial crisis, posted a sharply lower fourth-quarter profit,
weighed down by its big workers' compensation business and a charge
to retire some high-cost debt.
The global insurer reported quarterly net income of $655
million, a decline from $2 billion in the year-earlier period,
while its closely watched operating profit declined to $1.37
billion from $1.67 billion a year earlier. Operating income
excludes realized capital gains and losses in insurers' big
investment portfolios and some other items.
The quarterly operating profit tallied 97 cents a share, down
from $1.13 a share in the year-earlier period, and fell short of
$1.05 a share projected by analysts polled by Thomson Reuters.
Much of the miss came as AIG adjusted the reserves for workers'
compensation claims to reflect a steep drop in interest rates last
year. In addition, the company took a charge to reflect additions
to reserves for other lines of business. Those two moves totaled
$562 million, or 40 cents a share.
Last year's fall in interest rates has been painful across the
insurance industry. Insurers earn a large portion of their income
by constantly investing premium dollars, and their investment
portfolios are heavily tilted toward high-quality bonds. Business
lines like workers' compensation, in which payments may stretch
over years, can be especially hard hit because premiums can end up
generating lackluster interest income for long periods.
But lower interest rates also aided AIG. The company said it had
issued about $3.3 billion of senior unsecured debt in 2014 at low
rates, and more in this year's first quarter. It is using this
lower-cost debt to replace higher-cost combination debt-and-equity
securities and senior notes. The extinguishment resulted in an $824
million, or 58 cents a share, charge that hit net income but not
after-tax operating income.
The results reflect the first full quarter at the helm of the
global insurer for Peter Hancock, who took over as chief executive
from Robert Benmosche on Sept. 1. Mr. Hancock will be on Friday
morning's conference call from California, where he is
participating in a White House summit on cybersecurity at Stanford
University. AIG is a major seller in the burgeoning area of
cyber-risk insurance.
The company's core commercial-insurance operation benefited from
a quiet North Atlantic hurricane season. But profit pretax
operating income fell in its consumer-insurance business, as its
life-insurance segment recorded a pretax charge of $104 million to
increase reserves for death claims as it continues efforts to
identify deceased policyholders for whom a valid death claim hasn't
been filed, pursuant to a resolution of an audit by state
authorities. Most big insurers have reached such pacts and are
scouring their books for overdue death benefits.
AIG said the company had repurchased about $1.5 billion of
common stock in the fourth quarter, and $4.9 billion for the full
year. On Thursday, its board authorized the repurchase of up to
$2.5 billion of additional shares.
Mr. Hancock said the fourth-quarter results "showed progress on
expense control, ongoing investments in our businesses and our
commitment to balance-sheet management," including "replacing
high-cost legacy debt with new issuances at lower interest
rates."
Mr. Hancock has said he doesn't expect abrupt changes in
strategy and objectives. But he has made one notable change: The
company is now reporting its results under two overall operating
segments--commercial insurance and consumer insurance--while
scrapping its previous breakdown of results by type of insurance:
primarily, property-casualty and life.
Under the new arrangement, the company will group commercial
property-casualty insurance with mortgage guaranty insurance and
the institutional-business side of its previous life-insurance and
retirement-services unit. Its new consumer segment will include
retirement products, and life, auto, home and other types of
personal insurance.
Write to Leslie Scism at leslie.scism@wsj.com
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