AIG’s commercial business delivers stable results but group profit down

Peter Hancock President AIG

AIG’s commercial business has reported marginally improved profits and flat revenues for 2014, although fourth quarter results were tarnished by prior year reserve increases. Overall, the New York-based insurance group posted a fall in net income for the full year of $7.52bn, down from $9.09bn in 2013, while total premiums were flat at $37.25bn. It also reported lower than expected 2014 fourth quarter earnings with overall net income down 67% to $655m.

In a year aided by low catastrophe and few large losses, AIG’s commercial property and casualty business unit reported more favourable results than the group as a whole. It delivered slightly higher income and an improved combined ratio. However, the fourth quarter was marked by a charge for prior year casualty business and a flat pricing environment.

Despite adverse prior year reserve development, AIG’s commercial property and casualty business posted pre-tax operating income for the full year 2014 of $4.29bn compared with $4.1bn in 2013, while premiums were more or less unchanged at $25.18bn.

The unit made an underwriting loss of $50m in 2014, an improvement on the $336m loss posted in 2013. Despite the charge for higher prior year reserves, the commercial lines combined ratio was 100.2% in 2014, an improvement on the 101.6% reported in 2013. The prior year reserve increases added 2.8 percentage points to the 2014 combined ratio, compared with 1.5 percentage points in 2013.

According to Peter Hancock, AIG’s president and chief executive officer, the fourth quarter of 2014 included both accomplishments and challenges. “We saw the early signs of expenses moving in the right direction, while both consumer and commercial property and casualty lines delivered accident loss year improvement from the same period last year,” he told analysts in a briefing last week.”

“We also recognise the challenges that have persisted this quarter and remain focused on them, specifically certain older years have resulted in reserve strengthening,” he said.

AIG took a $245m charge for prior year reserve developments in the fourth quarter and a $703m charge for the full year. This included commercial lines reserve increases of $145m and $551m respectively. It was caused by deterioration in 2004 and prior years, mostly for workers’ compensation, healthcare, pollution and international financial lines.

Mr Hancock noted a number of favourable trends as well as headwinds for AIG. “The reduction in inflationary expectations is good news for claims trends and underwriting results. Growth in the US is also encouraging and we will pursue new business with our disciplined approach,” he told analysts.

“Offsetting these positives is the impact of the sustained low interest rate environment and a decline in property casualty rate increases,” he added.

AIG’s property casualty rates were relatively flat in the fourth quarter of 2014 with increases in casualty lines offset by a 6% fall in US property rates. Increases were led by US financial lines, which were 2.1% higher, specialty at 1.9% and US casualty at 0.1%.

AIG’s commercial property and casualty premiums actually declined slightly in the fourth quarter of 2014 to $4.85bn from $4.69bn in the same period of 2013. Despite higher volumes of property and financial lines business, the fourth quarter reduction was caused by lower retention of renewal business and decreased new business, reflecting underwriting discipline in US casualty, said AIG.

Source-Commercial Risk Europe

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