American International Group (NYSE:AIG) posted lower earnings in its fiscal fourth quarter of 2014. The company reported that its operating profit fell to $1.37 billion, down from $1.67 billion the prior year. That works out to $0.97 per share compared to $1.13 per share from the year-ago period.
Pre-tax costs, including charges related to workers compensation insurance, adjustments for prior-year developments, and increased reserves in its life insurance unit, dragged down its results. Net income, which includes gains and losses on its investment portfolios, fell to $655 million, or $0.46 per share compared to $1.98 billion, or $1.34 per share, in the year-earlier period.
Putting results in perspective
AIG's commercial Property Casualty unit, by far its biggest, reported an underwriting loss for the quarter, with a combined ratio of 103.4%. That number masks improvements in AIG's operating expenses -- operating costs as a percentage of premiums earned fell to 12.4% this quarter, down from 14.6% last year. CEO Peter Hancock, who took the helm from Robert Benmosche, has made cost cuts a priority in juicing AIG's profitability.
Its Personal Insurance unit reported an underwriting profit, posting a combined ratio of 98.7% compared to 104.3% in the fourth quarter last year.
Beyond operational efficiency, AIG made financial efficiency a priority in 2014. The company repurchased $5 billion in high-cost debt during 2014, adding that, in culling its most expensive liabilities, the company expects to save approximately $249 million per year in pre-tax interest expense. It took a $1.3 billion accounting charge this quarter as part of its efforts to repay its high-cost borrowings.
Returning capital to shareholders remains on the list of priorities. After repurchasing $1.5 billion in stock last quarter, and $4.9 billion for the full year of 2014, the board of directors approved $2.5 billion in additional share repurchases.
Repurchases are immediately accretive to income and book value. The company spent an average of $55.60 to buy back stock in 2014, compared to its year-end book value per share of $77.69.
In addition, repurchases soothe investor concerns about growing the company's insurance book into an increasingly competitive environment. After several years of rising insurance rates, AIG reported that rate growth stagnated in the second and third quarters of 2014. Some analysts project that rate growth could turn negative in 2015 as insurers with excess capital compete aggressively on price to win business.
Repurchasing shares, particularly at a discount to book value, is seen as better use of capital than writing more insurance. In a conference call with analysts last year, new CEO Peter Hancock highlighted the fact that he was interested in right-sizing AIG's insurance lines and returning capital when pricing turned unfavorable. A new repurchase authorization is a step in that direction.
Although profits were down this quarter largely on the back of one-time charges, continued efforts to cut costs over the long haul should start to pay dividends in 2015.
Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: long January 2016 $30 calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.