American International Group, Inc. reported net income attributable to AIG of $2.0 billion or $1.34 per diluted share for the quarter ended December 31, 2013, compared to a net loss of $4.0 billion or $2.68 per diluted share for the fourth quarter of 2012.
In a release on February 13, the Company noted that the year ago quarter included a $4.4 billion net loss associated with the sale of ILFC and pre-tax catastrophe losses of $2.0 billion from Storm Sandy ($1.3 billion after tax). Full year 2013 net income attributable to AIG was $9.1 billion, or $6.13 per diluted share, compared with $3.4 billion, or $2.04 per diluted share, for the full year of 2012.
After-tax operating income attributable to AIG grew to $1.7 billion, or $1.15 per diluted share, for the fourth quarter of 2013, compared to $290 million, or $0.20 per diluted share, in the prior- year quarter, reflecting growth in each of AIG's core insurance operations. After-tax operating income for the full year of 2013 was $6.8 billion, or $4.56 per diluted share, up from $6.6 billion, or $3.93 per diluted share, in 2012.
AIG continues to pursue initiatives to reduce expenses and improve efficiencies to best meet the needs of its customers. These initiatives include centralizing work streams into lower cost locations and creating a more streamlined organization. In the fourth quarter of 2013, AIG incurred a pre-tax severance charge of $265 million associated with these initiatives primarily related to AIG Property Casualty.
"AIG's strong performance in both the fourth quarter and the full year of 2013 represents another successful milestone in our journey to further build on AIG's core insurance operations," said Robert H. Benmosche, AIG President and Chief Executive Officer. "Global demand for our products and services, combined with our reputation for innovation, has helped to reestablish AIG as one of the world's preeminent insurance companies.
"I am also pleased to announce the Board's capital management decisions to increase AIG's quarterly dividend by 25 percent and authorize the repurchase of up to an additional $1.0 billion worth of AIG Common Stock, both of which reaffirm the Board's confidence in our strategy and allow us to return a portion of our success directly to our shareholders," added Benmosche.
"Our profits illustrate the individual and combined earnings power of all three of our core insurance operations, as well as our ongoing commitment to capital management," continued Benmosche. "With another year of solid performance under our belts, I am confident that we have positioned ourselves for strong growth and profitability in all of our operating businesses. Most importantly, this foundation will enable us to focus our energy on our customers.
"In addition, our fourth quarter severance charge represents another step in AIG's continued transformation. We are increasingly a more agile, focused, and sustainable company. As we think about the long-term future of our company, we must be able to more efficiently meet and exceed the evolving expectations of our global customer base," Benmosche concluded.
Capital and Liquidity
-AIG shareholders' equity totaled $100.5 billion at December 31, 2013
-In the fourth quarter of 2013, issued $1.0 billion of 4.125 percent senior notes due 2024 and repurchased $1.1 billion of debt having an average coupon over 7.5 percent
-In January 2014, AIG reduced DIB debt by $2.2 billion through a redemption of $1.2 billion aggregate principal amount of its 4.250 percent Notes due 2014 and a repurchase of $1.0 billion of its 8.25 percent Notes due 2018 using cash and short term investments allocated to the DIB
-Repurchased 8.3 million shares of AIG Common Stock for an aggregate purchase price of approximately $405 million in the fourth quarter of 2013 (approximately $600 million for the full year 2013)
-AIG Parent liquidity sources increased to $17.6 billion at year- end 2013, including $13.1 billion of cash, short-term investments, and unencumbered fixed maturity securities, from $16.1 billion at year-end 2012
AIG Property Casualty's growth in pre-tax operating income is attributable to an improvement in underwriting results and an increase in net investment income, partially offset by the impact of higher severe losses. As a result of AIG's continued focus on capital management and legal entity simplification, AIG Property Casualty distributed $2.6 billion in cash dividends to AIG Parent during the fourth quarter of 2013, and a total of $4.1 billion for the full year of 2013.
Pre-tax catastrophe losses were $208 million in the fourth quarter of 2013, compared to $2.0 billion in the fourth quarter of 2012, which largely consisted of Storm Sandy losses. Net prior-year adverse development was $266 million, primarily attributable to runoff pollution remediation coverages and pre-2004 environmental business compared to $116 million for the fourth quarter of 2012. This adverse development was more than offset by an increased reserve discount benefit of $325 million arising from a charge of $322 million in Commercial Insurance from a lower discount rate on primary workers' compensation reserves, as well as a benefit of $647 million in AIG Property Casualty's Other category, primarily from the use of payout patterns specific to excess workers' compensation reserves. The fourth quarter 2013 accident year loss ratio, as adjusted, increased to 66.4, compared to 63.3, primarily reflecting the impact of severe losses of $277 million, which added 2.5 points to the loss ratio compared to the prior year quarter, largely offset by an improvement in underlying Commercial Insurance results. AIG considers first-party losses and surety losses greater than $10 million net of reinsurance to be severe losses. The fourth quarter 2013 acquisition ratio declined 0.7 points to 19.5, reflecting the timing of guaranty fund and other assessments and changes in the mix of business. The general operating expense ratio was 16.1, a 1.2 point decline as a result of lower bad debt charges, which were partially offset by an increase in employee incentive plan expenses.
Fourth quarter 2013 net premiums written increased 6 percent, excluding the effects of foreign exchange, a change in the timing of recognizing excess of loss-ceded premiums and loss-sensitive premium adjustments, reflecting growth of new business in both the Commercial and Consumer operating segments, rate increases and changes in the reinsurance structure. Excluding the items noted above, Commercial Insurance and Consumer Insurance fourth quarter 2013 net premiums written grew 7 percent and 4 percent, respectively. Commercial Insurance continues to focus on growing higher value lines of business and rate strengthening, while Consumer Insurance continues to target growth in selected markets.
The Commercial Insurance combined ratio improved 22.6 points to 107.7, largely from lower catastrophe losses. The combined ratio was negatively impacted by 6.1 points due to the change in the discounting of primary workers' compensation reserves. The fourth quarter 2013 accident year loss ratio, as adjusted, increased 0.9 points to 67.3 as a result of $197 million in higher severe losses, primarily in Property, which offset improvements in Casualty. The fourth quarter 2013 acquisition ratio increased 0.6 points to 16.1, primarily as a result of the timing of guaranty fund and other assessments as well as a change in business mix. The general operating expense ratio decreased 0.2 points to 13.7, primarily due to lower bad debt charges, which were partially offset by higher employee incentive plan expenses.
The Consumer Insurance combined ratio decreased 7.9 points to 103.3 largely as a result of lower catastrophe losses. The Consumer Insurance accident year loss ratio, as adjusted, increased 2.7 points to 60.7 primarily due to higher Accident & Health losses, as well as severe loss activity in Private Client Group. The fourth quarter 2013 acquisition ratio decreased 1.7 points to 25.2 due to lower direct marketing expenditures. The general operating expense ratio increased 1.3 points primarily due to higher employee incentive plan costs.
AIG Life and Retirement's pre-tax operating income in the fourth quarter of 2013 increased 29 percent to $1.4 billion. The business achieved strong sales, generated significant positive net flows and executed continued initiatives to enhance profitability. AIG Life and Retirement's diversified distribution platform delivered near- record sales of variable annuities, fixed annuities and retail mutual funds. Net flows continued to reflect strong positive momentum, increasing by more than $2.9 billion from the prior-year period. Increased flows and higher account balances resulted in higher fee income in the quarter, continuing the trend from prior quarters. Higher net investment income and ongoing active spread management also benefited results.
Net investment income increased 6 percent to $2.9 billion, driven by higher returns on alternative investments, increased gains on calls and tenders, and appreciation of hybrid securities. The portfolio base investment yield was 5.29 percent compared to 5.33 percent in the fourth quarter of 2012. Consistent with recent quarters, this decline reflected the current interest rate environment and reinvestment of assets over the last 12 months at rates that were lower than the weighted average yield of the overall portfolio. In an ongoing effort to mitigate the impact of low interest rates, AIG Life and Retirement has pursued a strategy of actively managing spreads through crediting rate actions on existing business, duration matching of assets and liabilities, and disciplined pricing on new business. In the fourth quarter, AIG Life and Retirement continued to realize capital gains in its fixed maturity investment portfolio in connection with utilizing capital loss carryforwards. Consistent with prior quarters, reinvestment of proceeds from such sales negatively impacted the base investment yield.
Assets under management rose 10 percent to $318.0 billion from the prior-year quarter. Net flows and separate account values increased substantially compared to the prior-year period. AIG Life and Retirement's retail investment products continued to be well received in the marketplace and were a key driver of the increase in assets under management. Strong equity market performance further drove the increase in investment product account values. Additionally, the development of the stable value wrap business accounted for a $14.2 billion increase in assets under management from the prior-year period.
Premiums and deposits totaled $8.0 billion, up 54 percent, consistent with the continued strong pace of growth seen in recent quarters. Increased sales of investment-oriented products, including individual variable annuities, retail mutual funds, and fixed annuities, primarily drove the increase to which Group Retirement and Institutional Markets also contributed. Premiums and deposits for Retirement Income Solutions and Retail Mutual Fund product lines increased 99 percent and 107 percent, respectively. Fixed Annuities product line premiums and deposits totaled $995 million for the quarter, up from $247 million in the fourth quarter of 2012.
The Retail operating segment reported quarterly pre-tax operating income of $820 million, an increase of 37 percent, driven by higher net investment income on alternative investments, active spread management on interest rate sensitive products, and higher fee income on variable annuity separate account assets. In an effort to better serve its retail client base, in the fourth quarter, AIG Life and Retirement formed AIG Financial Network to focus on providing middle and upper-middle income families and small businesses with a broad range of best-in-class products and services that address a multitude of consumer needs for financial protection, asset accumulation, and lifetime retirement income.
The Institutional operating segment reported quarterly pre-tax operating income of $586 million, an increase of 19 percent. Results were driven by higher net investment income on alternative investments, higher policy fee income and lower interest crediting rates due to active spread management.
In the fourth quarter of 2013, AIG Life and Retirement distributed $1.3 billion in cash dividends and loan repayments to AIG Parent for a total of $4.4 billion for the full year of 2013.
United Guaranty Corp. (UGC), AIG's residential mortgage guaranty operations, reported pre-tax operating income of $48 million compared to an operating loss of $45 million in the fourth quarter of 2012. Results reflected increased earned premiums from business written after 2008 using UGC's risk-based pricing strategy along with lower incurred losses in its first-lien book of business due to declining newly reported delinquencies and increasing cure rates in its delinquent inventory. In the fourth quarter of 2013, 59 percent of net premiums earned were from business written after 2008.
First-lien new insurance written totaled $10.9 billion in principal of loans insured for the quarter, down from $11.6 billion for the same period in 2012, driven by decreased origination activity, due primarily to a 71 percent decline in mortgage refinancing activity which was partially offset by a 43 percent increase in originations for home purchases. Quality remained high, with an average FICO score of 753 and an average loan-to-value of 91 percent on new business. Net premiums written grew 8 percent to $255 million in the fourth quarter of 2013 due to growth of the first- lien inforce book.
UGC paid a $90 million cash dividend to AIG in 2013, its first dividend since 2010.
AIG's Other Operations (excluding Mortgage Guaranty) reported a fourth quarter 2013 pre-tax operating loss of $62 million, compared to pre-tax operating income of $300 million for the fourth quarter of 2012. The pre-tax operating loss for the fourth quarter of 2013 included the severance charge of $265 million disclosed above. The year-ago quarter included a $240 million pre-tax gain related to AIG's interest in AIA Group Limited.
AIG is the marketing name for the worldwide property-casualty, life and retirement, and general insurance operations of American International Group, Inc.
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