AIG’s Consumer Insurance segment reported a drop in 4Q14 earnings

AIG’s 4Q14 and fiscal 2014 earnings: Key takeaways (Part 12 of 15)

(Continued from Part 11)

Decline in earnings

AIG’s (AIG) Consumer Insurance segment provides life insurance, retirement, and property and casualty insurance products and services to consumers. In 4Q14, this segment reported a lower pre-tax operating income compared to 4Q13, driven by lower net investment income and lower profitability in the life insurance businesses.

Retirement segment

As shown in the chart above, the Retirement segment posted a 25% lower pre-tax operating income in 4Q14 versus 4Q13. This decline was driven by a drop in investment income, which was offset by increased fee income due growth in assets under management.

Assets under management increased by 3% due to net inflows in variable annuity products and appreciation of separate account assets due to positive market movements. For further information on the assets of a life insurer, please read our series An investor’s guide to the insurance business.

Growth in assets under management was partially offset by outflows in fixed annuities and group retirement products due to low interest rates. It was also offset by the loss of business in two large group plans, which the management outlined as a one-off event without significant impact on earnings. On the other hand, AIG expects pressure in fixed annuity sales to continue in future.

Yields and spreads

As we see in the chart below, AIG was able to stabilize investment spreads to some extent by reducing the cost of funds. The investment spreads show a stable profile compared to a falling yield. This was brought about by managing crediting rates, which determines payouts for policies, in both existing business as well as new businesses.

Life insurance businesses, like that of MetLife (MET), Prudential Financial (PRU), Principal Financial (PFG), and other life insurers in the Financial Select Sector SPDR ETF (XLF), are facing pressures on their investment spreads due to the low interest rate scenario.

We’ll look at AIG’s life insurance business in the next article.

Continue to Part 13

Browse this series on Market Realist:

• Part 1 - AIG’s net income down in 4Q14, insurance operations earnings flat

• Part 2 - AIG delivers on its financial objectives

• Part 3 - AIG’s 4Q14 operating income from insurance businesses remain flat