Net income at American International Group fell almost $2 billion to $6.4 billion in the first half of this year, from $8.3 billion in the first half of 2005. Part of the reason for the decline is difficulties in the company’s life business in Japan and Taiwan, but analysts believe AIG’s strong property/casualty results make up for the disappointing results in the foreign life unit.
Net income in the second quarter was $3.2 billion, down from $4.5 billion in the second quarter of 2005.
Jay Cohen, an equity analyst at Merrill Lynch, said in a report that the most disappointing news from the quarter was the performance of the foreign life and retirement savings unit, which grew 5.4%, excluding price gains. He said this business had also performed badly in the two previous quarters, but this was because of unusual items – the settlement of a Philippine tax dispute in the fourth quarter of 2005 and the writing down of credit card receivables in Taiwan in the first quarter of this year.
“In the second quarter it was evident that the slowdown in foreign life/retirement services earnings was due to fundamental reasons,” said Cohen in the report. But he adds, “Although fundamental softness sounds worse than a miss from one-time items, the fundamental issues appear to be confined to two markets. AIG is taking action to address the profitability in Japan and Taiwan and some pressure was expected by investors, in our view.”
Cohen said that because the difficulties appear limited to two markets, the damage to AIG is reduced. Low interest rates in Taiwan are squeezing profits in AIG’s life business in that market. And business in Japan is less profitable now than a few years ago.
Martin Sullivan, CEO of AIG, outlined how the company was addressing these problems in a statement. “We are taking appropriate action, including shifting our product mix to emphasize investment-linked and personal accident and health products that provide better margins than traditional savings-oriented life products in the current low interest rate environment.”
Strong results in AIG’s property/casualty business offset the troubles in its foreign life business. Its general insurance operations posted a combined ratio of 86.5% for the quarter, an improvement on the 91.9% combined ratio in last year’s second quarter. The combined ratio for the first half of the year was 87.8%, down from 92.7% in the same period last year.
Cohen said in the report that the strong performance in AIG’s property/casualty business was overdue. “The very good underwriting result is not a huge surprise to us: What is more surprising is that, after a significant amount of cumulative price increases and improved terms and conditions in AIG’s key lines of business over the past four years, AIG’s margins have not arrived at this level sooner,” said Cohen.
