AIG: Interest Rates To Blame In Quarterly Profit Loss

WASHINGTON – American International Group said profit declined 67 percent in the last quarter related to a year ago because it shored up reserves and also because results declined significantly at its life and retirement units.

Operating results in the newly formed consumer business unit fell 21 percent to $923 million because of the drop in the life and retirement businesses.

The fourth quarter was the first full quarter without CEO Robert Benmosche, who is credited with turning around the huge company after its near-death collapse during the recession.

New CEO Peter D. Hancock said during a conference call that low interest rates are grinding down results in the life units and will likely continue as long as rates stay low. Other large companies, such as Prudential Financial, also cited lower rates as a main factor in low earnings in the fourth quarter.

AIG said its after-tax income declined to $1.4 billion, or 97 cents a share, from $1.7 billion, or $1.06 a share, a year ago. Most of that was related to a discount of $562 million in added reserves partly for its workers compensation business. There was also a pre-tax charge of more than $100 million because of the life unit, according to David L. Herzog, chief financial officer.

Some of the losses stemmed from an initiative by state insurance regulators to require insurers to identify deceased insureds and their beneficiaries in cases where claims were not paid, Herzog said. AIG and other insurers have pledged to match death records with their life policies to make certain claims are paid.

Herzog also said that AIG also lost two large group contracts in its retirement business, which “we believe are part of the normal competitive pressures in this business.” Herzog and Hancock said the loss of the two contracts were likely due merely to competitive pressures and do not constitute a trend.

During the call, Adam Klauber, an analyst at Blair and Co., asked if the results in the life segment, “was generally a weaker quarter [where] income was lower than it's been really over the last five or seven. Should we think about this as more of a typical quarter or should we think about it, look at the context of those segments more on an annual basis versus the fourth quarter?”

However, Kevin Hogan, who now heads the AIG consumer unit, which includes property and casualty personal lines as well as all life/retirement/health businesses, cited the charge for death claims that had not been paid, but also noted lower interest rates will continue to be an issue.

Another analyst, Larry Greenberg, of Janney Capital, implied that AIG’s decision to be very conservative in its crediting rates on variable products, and therefore less competitive, may have been a factor.

“I guess, in particular, it appears you've been pretty aggressive in managing crediting rates, and I'm wondering if maybe that is having an impact on the business just recognizing the flow of surrender activity and overall flows,” Greenberg said. He also noted that the return on assets in that business “has been trending down as well.”

Hogan denied that. “Actually, we consider the health of the Group Retirement business actually quite strong.”

He said AIG continues to recruit advisors, and that, “We have had good success with the process of extending some of the product portfolio that we're able to represent in that business.”

He denied any connection between the more conservative pricing and losing the two large group contracts. “While it is true that we are and we continue to be disciplined in our new business pricing, we don't see the loss of these large cases as relevant to that,” Hogan said. “We continue to invest in this business.”

Hogan acknowledged that the personal lines unit expects net investment income to be lower in 2015 by approximately $200 million due to the significant distributions of excess capital to the parent holding company in 2014.

Hogan’s enlarged role stems from a company reorganization following the exit last fall of Jay Wintrob, who headed the life/retirement unit. When Hancock took over after Benmosche left, he changed AIG’s structure so that one of the two main units focused on sales to consumers, while the other serves commercial clients.

Previously, the split was between life insurance and property-casualty coverage. The latest earnings report reflected the new earnings breakdowns.

Hogan also said that non-indexed fixed annuity sales declined because of low interest rates.

“We expect the sales of fixed annuities, although up on a sequential basis, will remain challenged in the current low interest rate environment as we continue to maintain new business pricing discipline,” Hogan said.

Regarding the unclaimed property issue, which has been costly for all life insurers, Hogan said there “has been an ongoing process of working with the new process for identifying deceased policyholders and their beneficiaries.”

He said AIG has “much more experience now with the vendor and with the matching process, and we went through an extensive analysis.”

He added that, “We're getting down to the last, I think, processes with the vendor, and we have some insight into what we believe is going to be coming in the matching process in the future. So, right now, this is our best estimate of what we think will bring us to the conclusion of this process. But until we get the files from the vendor and engage in the physical matching, we can't provide a 100 percent guarantee.”

InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected].