American International Group, Inc. (AIG)

[TRUISM]

AIG Turnaround Still A Work In Progress
By Matthew Lerner February 13, 2015
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Photo by Bloomberg



Despite a sharp fall in profit in the fourth quarter of 2014, American International Group Inc. is making progress in improving its business, but the insurer has a ways to go before the years' long turnaround is complete, according to analysts.

The New York-based insurers' management was more bullish in a conference call discussing the results Friday, highlighting a stock buyback and other positive developments.

AIG reported on Thursday 2014 fourth-quarter net income of $655 million, a 67.2% fall compared with the same period in 2013, on an $834 million charge for debt extinguishment.

On a conference call with analysts Friday morning, CEO Peter Hancock said the debt extinguishment provided a half-billion dollars worth of “incremental economic value” to shareholders despite the size of the charge.

Mr. Hancock also gave the company's new $2.5 billion stock buyback a high profile at the beginning of the call while conceding challenges such as the ongoing effects of the low-interest-rate environment and a decline in property/casualty rate increases.

Net premiums written for AIG's commercial insurance operations in the quarter fell 3.3% to $7.56 billion, while investment income slid 1.0% to $1.25 billion. The fourth-quarter combined ratio for commercial insurance improved to 96.5% from 101.7% in the year-ago period.

Net premiums written in the company's property/casualty business declined 3.2% to $4.69 billion, while net investment income in the segment fell 7.2% to $1.11 billion.

John Doyle, executive vice president and CEO of commercial insurance for AIG, said on the call that U.S property rates were down 6% in the quarter.

The insurer's fourth-quarter property/casualty combined ratio improved to 103.4% from 108.7% in the same period last year.

Life operations strong

David Herzog, executive vice president and chief financial officer, said the company's newly announced $2.5 billion stock buyback reflected strong cash flow from AIG's life insurance operations.

He added that 2015 could see $6 billion to $7 billion in potential stock buybacks and dividends. AIG also repurchased $1.5 billion in stock in the fourth quarter.

Analysts were mixed on the quarter.

In a note published after results, Cliff Gallant, San-Francisco-based analyst with Nomura Securities, said the results were “OK with signs of improvement,” citing an improved underlying commercial combined ratio before reserve additions, discount rate changes and catastrophes as well as the debt reduction and stock buybacks.

Mr. Gallant said that compared with others in the sector, AIG's underlying combined ratio is not nearly as good as its peers, nor is its return on equity. However, the insurer is making progress, he said.

Amit Kumar, New York-based vice president and senior analyst of insurance at Macquarie Capital (USA) Inc., was less optimistic, writing in his note that “the noise from adjustments to reserves was higher than anticipated. We do not think the company is nearing the finish line in terms of volatility in quarterly reserve adjustments.”

For full year 2014, commercial insurance net written premiums slipped 0.04% to $33.43 billion, while net investment income fell 4.1% to $4.92 billion.

The full-year commercial insurance combined ratio improved to 96.3% from 98.2% in 2013.





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