On February 12, American International Group Inc (AIG) reported lower than expected forth quarter earnings mostly due to workers’ compensation plans, refinancing legacy debt, and lower coupon interest rates.
AIG reported a $655 million net income, with $0.46 per share, for the quarter between September and December 2014. For the same period, in 2013, the company reported a nearly $2 billion net income, so this year’s Q4 earnings report revealed a 67 percent drop in earnings.
The report also showed that the multinational insurance corporation failed to comply with the Street’s expectations of $1.05 per share in the last quarter. But financial analysts have an explanation:
“In some respects it was a kitchen sink quarter. They did a lot of cleanup work here,”
said Cathy Seifert, equity analyst at the S&P Capital IQ.
On the same day the Q4 report was released, AIG’s Board of Directors approved a high-cost common stock buyback plan, with a $0.215 worth of quarterly dividend, and a total share price of more than $2.5 billion.
“Our continued focus on managing our balance sheet to reflect our improved risk profile, combined with continued insurance company dividends, has contributed to the Board’s approval of an additional $2.5 billion share buyback authorization,”
reported Peter D. Hancock, chief executive and president of AIG.
Mr. Hancock announced that the forth quarter results reflected his company’s efforts of reducing expenses, extending investments in its businesses, and balancing its sheet management.
Mr. Hancock explained that AIG’s business mix led to more stable total insurance profits, while the strong balance sheet resulted in a positive capital management in the last quarter by repurchasing common shares and debt.
Additionally, AIG replaced its “high-cost legacy debt” with new issuances at lower interest rates. As a result, the book value of its shares increased by 12 percent since the forth quarter’s results of 2013.
AIG’s CEO described 2014 as “a year of transition and transformation” since the company took important steps towards becoming the world’s most valued insurer. Among those steps he mentioned several initiatives based on value benefits that would benefit both customers and shareholders, and which would be continued in 2015. He also spoke about efforts of streamlining operations and reducing cost structure.
Analysts explained that the drop in AIG’s earnings is also linked to lower interest rates, since an important part of the company’s portfolio is based on investing in high-quality bonds. Low interest rates also pressed AIG to adjust the funds for its workers’ compensation plans, which were hard-hit by the low-interest incomes.
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