AIG's Profit Falls 29 Percent on Derivative Declines (Update4)
bloomberg.com
Aug. 9 (Bloomberg) -- American International Group Inc., the world's largest insurer, said second-quarter profit dropped 29 percent as record underwriting profit was countered by a decline in the value of derivative investments held during the period.
Net income dropped to $3.19 billion, or $1.21 a share, from $4.49 billion, or $1.71, a year earlier, the New York-based company said in a regulatory filing today. The value of derivatives hedging against foreign-exchange and other risks dropped, reducing net income by $824 million.
Profit excluding the derivatives and other adjustments exceeded analysts' estimates as underwriting income from property and casualty coverage surged 93 percent on lower claims costs and higher premiums. Earnings from the company's international life insurance business fell short of expectations as competition increased in Japan.
``Property and casualty can provide upside only so long,'' said Mark Lane, an analyst at William Blair & Co. in Chicago who has an ``outperform'' rating on the company's stock. ``Foreign life needs some key senior management attention.''
AIG's results beat Lane's estimate by 10 cents a share as underwriting income increased to $1.37 billion, higher than the $1.07 billion he expected. Pretax profit from sales of international life insurance and retirements savings products rose 4.2 percent to $1.5 billion, excluding the accounting adjustment, than Lane's 5 percent projection. The average quarterly growth rate in 2004 and 2005 was 22 percent.
Martin Sullivan, who replaced Maurice ``Hank'' Greenberg as chief executive officer last year, is trying to restore confidence in AIG's earnings prospects after settling probes of the company's accounting and sales practices for $1.64 billion in February. The stock dropped 14 percent this year, more than the 6.1 percent decline in the KBW Insurance Index.
`Appropriate Action'
``We are taking appropriate action,'' Sullivan said in a statement about the market in Japan and Taiwan. The company is shifting its product mix to emphasize investment-linked and health products that offer higher profit margins than traditional savings-oriented life insurance, he said.
Greenberg, who ran AIG for 38 years, was removed in March 2005 and has since been accused of accounting fraud in a civil lawsuit filed by New York Attorney General Eliot Spitzer. During his tenure, Greenberg, 81, made the insurer one of the 10 most valuable companies on the Standard & Poor's 500 Index and was the industry's public face in Washington and abroad.
``In order for the stock to regain its lost ground, investors must begin to believe once again in the company's growth potential,'' said Jay Cohen, an analyst at Merrill Lynch & Co. in New York, before the earnings were released. He has a ``buy'' rating on the company's stock.
Spitzer
Sullivan, one of Greenberg's proteges, settled AIG's part of the lawsuit after navigating two earnings restatements lowering 2000 to 2005 net income by $3.4 billion, or about 7 percent.
Spitzer accused AIG, under Greenberg, of using sham reinsurance contracts and other transactions to mask losses and understate liabilities. Greenberg said much of the restatement was unnecessary and is fighting the allegations.
AIG's net income in the second quarter of 2005 included a $1.27 billion gain as the value of derivatives held at the time increased. Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.
``These shifts in the value of derivatives reflect unrealized gains and losses and they have minimal effect on shareholder equity,'' said AIG spokesman Chris Winans. |
