AIG Earnings: Lower Investment Income Offsets Underwriting, Business Growth

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AIG (NYSE:AIG) recently reported earnings for the first quarter of 2015, reporting net income of $2.5 billion compared to $1.6 billion a year ago. [1] The increase came on the back of an improvement in the underwriting performance of the property and casualty (P&C) insurance business as well as the sale of certain holdings that resulted in an after-tax benefit of $565 million. However, the low interest rate environment continued to weigh on the business. [2] In this note, we take a look at the key takeaways from AIG’s earnings for the first quarter of 2015.

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Property And Casualty Underwriting Improves

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AIG, which  ranks among the top ten P&C insurers in the U.S. with a market share of 3.9% in terms of premiums earned, continued to benefit from improvements in underwriting performance and business growth during the first quarter. [3] [1] However, foreign currency fluctuations and lower investment income erased those gains. The combined ratio, the ratio of claims to premiums earned, in the commercial P&C segment improved to 97.1% in the first quarter compared to 98.9% a year ago due to lower catastrophe-related losses as well as reduced unfavorable prior year reserve development. In particular, the company benefited from net favorable prior year loss reserve developments in the U.S. and EMEA (Europe, Middle East and Africa) markets. The 6% year-over-year (y-o-y) increase in net premiums written in the commercial P&C segment was reduced to just 1% due to foreign currency fluctuations during the quarter.

Life and Retirement Business Slows Down

The low interest rate environment, as well as a decline in returns from AIG’s alternative investments, had a significant impact on the company’s life insurance and retirement solutions businesses. The pre-tax operating income from retirement solutions business declined by 19% y-o-y to $46 million during the quarter, despite growth in total assets under management and fees from variable annuity policies. Premiums and deposits also registered a decline, as lower interest rates affected the fixed annuities product line.

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Notes:
  1. AIG Reports First Quarter 2015 Net Income of $2.5 Billion and Diluted Earnings Per Share of $1.78, AIG Press Release [] []
  2. SEC 8-K Filing []
  3. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2014 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM []