American International Group Inc reported lower-than-expected fourth-quarter earnings on Thursday as low interest rates and refinancing expensive debt hurt the insurer's results. The New York-based company, the largest commercial insurer in the United States and Canada, reported a 67 percent drop in net income to $655 million, or $0.46 per share for the quarter ended December 31, compared with $2 billion, or $1.34 per share, a year earlier.
Analysts on average had expected earnings of $1.05 per share in the fourth quarter, according to Thomson Reuters I/B/E/S. On an operating basis, the company earned $1.4 billion, or $0.97 per share. "In some respects it was a kitchen sink quarter. They did a lot of clean up work here," said S&P Capital IQ equity analyst Cathy Seifert.
AIG shares were down 1.6 percent at $51.62 after the bell. AIG bought back expensive debt, leading to an after-tax loss of $824 million, or $0.58 per diluted share. Operating income was hurt by lower workers' compensation discount and total adverse prior-year reserve development. AIG also declared a dividend of $0.125 per share and authorised the repurchase of up to $2.5 billion worth of shares.
"Workers compensation partly relates to lower interest rates. That doesn't have anything to do with AIG per se," said Paul Newsome, of Sandler O'Neill + Partners, L.P. As interest rates remain near zero, bond investors - including insurance companies - have struggled to achieve returns. Newsome cautioned that AIG's efforts to simplify itself are not yet done.
"This quarter will represent a setback in their efforts to become a simple, more-easily understood company," Newsome said. In a memo to employees obtained by Reuters, Chief Executive Officer Peter Hancock said the company "deliberately" refinanced debt, "understanding that there would be a short-term impact to earnings, because we knew that the positive earnings impact over the longer term would be better for stakeholders." The fourth quarter marked the first full quarter under Hancock, previously head of the company's property-casualty business. He succeeded Bob Benmosche, who helped turn the company around after bad bets on derivatives nearly sank the company during the financial crisis.