American International Group Inc. (AIG) today reported net income of $1.8 billion for the quarter ended June 30, 2015, compared to $3.1 billion, for the second quarter of 2014. Second quarter net income declined primarily due to ongoing liability management activities, lower capital gains from sales of investments, and a net gain on the sale of divested businesses related to the sale of International Lease Finance Corp. in the second quarter of 2014, the insurer said.

After-tax operating income was $1.9 billion for the second quarter of 2015, compared to $1.8 billion in the prior-year quarter. AIG said operating results in the second quarter reflected higher pre-tax operating earnings of AerCap Holdings N.V.  and the fair value of PICC Property & Casualty Company Limited and People’s Insurance Co. of China Limited investments, partially offset by a decrease in income from insurance operations.

“Our second quarter results demonstrate our steadfast commitment to value-based management – we’re taking action today to create long-term value for tomorrow,” Peter D. Hancock, AIG president and chief executive officer, commented.

“Our focus on value and long-term sustainability benefits our clients and our shareholders. We’ll continue to balance growth, profitability and risk as we work to become our clients’ most valued insurer.”

ACE-Chubb Effect

Asked during an analysts’ call about the effects of the ACE-Chubb merger, CEO Hancock said it has no direct effect on AIG’s strategy but he sees opportunity for AIG, which is already a major player in the high net worth market, as a result of the ACE-Chubb marriage.

“It does create opportunity in terms of customers, talent and a slight shift in the balance of power between carriers and brokers” given there will be fewer carriers in the market, he said.

AIG’s Private Client Group serves the high-end personal lines market that is also targeted by both Chubb and ACE, which strengthened its position last year when it took over the high net worth business of the other major carrier in the space, Fireman’s Fund.  Thus the number of larger insurers serving this market will be down to two.

He said AIG is not interested in a large acquisition at this time as it is still merging two of its Japanese units, AIU and Fuji Fire & Marine, a process the company said is taking somewhat longer than anticipated.

Hancock did say AIG may be making “modest” acquisitions.

Analysts’ Reaction

AIG’s results are “a huge improvement from the bad old days, but well below its potential,” David Havens, a credit analyst at Imperial Capital, said in a note reported by Bloomberg News. “And that’s probably the biggest issue confronting management and the board today.”

S&P Capital IQ analyst Cathy Seifert expressed concern over AIGs insurance results.

“I found the insurance underwriting results fairly disappointing across the board and I’m hoping they don’t portend a broader-based weakness,” Seifert told Reuters.

COMMERCIAL INSURANCE

Pre-tax operating income decreased to $1.5 billion from $1.6 billion in the prior-year quarter, primarily due to lower underwriting results from Property Casualty and Mortgage Guaranty, as well as lower net investment income from Institutional Markets, partially offset by an increase in net investment income from Property/Casualty.

Property/Casualty

Property/Casualty’s decrease in pre-tax operating income is attributable to lower underwriting income partially offset by an increase in net investment income. The combined ratio increased 2.3 points to 98.8 in the second quarter of 2015 from the prior-year quarter. The loss ratio increased 3.1 points to 70.8, primarily due to higher net unfavorable prior year loss reserve development, and higher catastrophe losses, partially offset by a higher net loss reserve discount benefit for workers’ compensation reserves.

Catastrophe losses were $209 million compared to $121 million in the prior-year quarter. Net unfavorable prior year loss reserve development was $279 million, including return premiums of $12 million, primarily due to commercial automobile liability in U.S. Casualty, compared to net favorable prior year loss reserve development of $63 million in the prior-year quarter, which included an additional premium of $68 million. The net reserve discount benefit was $270 million compared to $16 million in the prior-year quarter, reflecting an increase in the discount rate used on workers’ compensation reserves, primarily due to higher Treasury rates beginning in the first quarter of 2015. In the fourth quarter of 2014, Pennsylvania and Delaware regulators gave AIG approval to update this discount rate on a quarterly basis beginning in the first quarter of 2015.

The accident year loss ratio, as adjusted, increased slightly by 0.1 points to 66.6, reflecting higher current accident year losses in U.S. commercial automobile liability, and higher severe losses in Specialty, partially offset by an improvement in U.S. Property. The acquisition ratio decreased by 0.3 points to 15.1, reflecting lower amortization of previously deferred costs, lower premium taxes, and guaranty fund and other assessments. The general operating expense ratio decreased 0.5 points to 12.9, primarily due to efficiencies from organizational realignment and a decrease in employee incentive costs, partially offset by increased technology-related expenses.

Net premiums written decreased 4 percent compared to the prior-year quarter. Excluding the effects of foreign exchange, net premiums written increased modestly compared to the prior-year quarter.

New business increases in the growth-targeted products in Financial lines and Specialty, across all regions, were largely offset by declines in U.S. Casualty and Property, reflecting pricing discipline.

Mortgage Guaranty

Mortgage Guaranty’s pre-tax operating income decreased to $157 million compared to $210 million in the prior-year quarter, due to favorable prior year loss reserve development in the first-lien business recorded in the prior-year quarter. Excluding the effects of prior-year loss reserve development, pre-tax operating income increased $19 million, or 16 percent, compared to the prior-year quarter, due primarily to the decline in accident year losses from lower delinquency rates and higher cure rates. The improvement in accident year losses reduced the accident year loss ratio, as adjusted, by 9.3 points compared to the prior-year quarter. The slight increase in the acquisition ratio was due to increased expenses of sales support activities, resulting from the increase in new insurance written. The increase in the general operating expense ratio was primarily due to an increase in servicing costs related to the growth in the in-force business.

Net premiums written increased 11 percent to $277 million compared to the prior-year quarter. Domestic first-lien new insurance written of $15.2 billion in principal amount of loans insured increased 37 percent from the prior-year quarter, driven by an increase in mortgage originations primarily from refinancing activity as a result of a reduction in mortgage interest rates and improvements in existing home sales due to lower down payment requirements. New business written during the second quarter of 2015 had an average FICO score of 752 and an average loan-to- value ratio of 91 percent.

PERSONAL INSURANCE

Personal Insurance pre-tax operating income decreased to $70 million compared to $140 million in the prior-year quarter, due to decreases in net investment income and underwriting income. The combined ratio increased by 0.9 points to 99.7, which reflected an increase in the expense ratio partially offset by a decrease in the loss ratio.

The loss ratio and accident year loss ratio, as adjusted, improved by 0.8 points and 0.6 points to 52.7 and 52.8, respectively, compared to the prior-year quarter. Improved performance in a warranty retail program contributed to the decrease in the loss ratios, which was offset by an increase in the acquisition ratio due to a related profit sharing arrangement. Excluding the effect of this warranty retail program, the loss ratios increased due to automobile and property losses in the current quarter, partially offset by Accident and Health, which showed improvement in both loss and acquisition ratios.

The general operating expense ratio increased by 0.7 points compared to the prior-year quarter, primarily due to higher employee-related expenses and the timing of technology-related initiatives.

Excluding the effects of foreign exchange, net premiums written increased 2 percent from the prior- year quarter, reflecting growth in automobile across all regions and in property businesses primarily in the U.S. and Japan, partially offset by declines in U.S. warranty service programs.

Source: AIG