When the U.S. insurance giant American International Group (AIG, Financial), better known as AIG, posted its financial numbers on February 12, it left investors and analysts worried about the upcoming future of the company as it gave out worse results than actually expected by the Street. Both the top and bottom lines failed to pacify the Street estimates and soon after the earnings were declared the stock drove into negative territory, slipping almost 1.6% in the after-hours trading session. Let’s dive in and find out what happened in AIG’s fourth quarter and whether there was any good news that was shared with the existing investors to keep them engrossed in AIG’s stock which has been up 7% on the earnings date when compared on a year-over-year basis.
The disappointing numbers
The company recorded a loss of $824 million due to elimination of debt on an after-tax basis during the quarter and also there were costs incurred that was linked to boosting the company’s reserves. Such factors led to the decline of net income by around 17.9% year-over-year at $1.37 billion for the fourth quarter, or earnings of $0.97 a share, that missed the Street analyst consensus of $1.05 per share.
The CEO, Peter Hancock, referred to the year as a “year of transition” and stated that the company remains committed to streamlining its operations and reducing its costs going forward. He emphasized that the company would nevertheless concentrate on breaking the insurance business into two segments – the commercial wing and the consumer wing. In the fourth quarter, the commercial insurance division posted pre-tax operating income that was up by a whopping 23% from $973 million in the prior year period, to $1.2 billion. But the consumer insurance segment which saw a decline in the retirement and life insurance sectors’ investment fell from $1.2 billion posted a year earlier to around $923 million for the quarter.
The company total general operating expense declined over 5% in 2014, compared to the previous year. And the company has shared its interest to reduce annual operating expenses by 3-5% through 2017. Reiterating on the same, the CEO stated during the earnings call, “Our fourth-quarter results showed progress on expense control, ongoing investments in our businesses, and our commitment to balance sheet management…”
Despite being in the red, share repurchase continues
The company has already repurchased $4.9 billion worth of shares in 2014. Over that, after this earnings conference the management has approved a $2.5 billion share repurchase program which might serve as a sweetener for investors tensed with the fall in net income of the company in the recently ended fourth quarter. Additionally, AIG has just committed to payong a dividend worth $0.125 per share which is like cherry on the cake for the existing investors. This shows that the company remains deeply committed to improving the shareholder value of its stockholders in the long run.
A brief glance forward
Though the earnings growth of AIG was dampened in the fourth quarter, Hancock seems dedicated to generating higher earnings in the forthcoming quarters. And this is apparent from the memo to employees obtained by Reuters, where he has suggested that the company "deliberately" refinanced debt, "understanding that there would be a short-term impact to earnings because we knew that the positive earnings impact over the longer term would be better for stakeholders." Keeping his vision in mind, let’s stay tuned and watch out how this insurance giant which has once again stood up after the huge turmoil it faced during the financial crisis paves its way to achieve the set goal in terms of bottom line growth in the pursuant quarters.
