In proxy statement, insurer says its D&O premiums soared 249 percent
American International Group management, after reporting a first-quarter 44 percent jump in net income, said that rating firm downgrades had only a minor impact on the insurer.
With results restated for prior first quarters, the New York-based insurer said it had first-quarter net income of $3.68 billion, or $1.40 per share, compared to $2.56 billion, or 97 cents per share, in the first quarter of 2004.
Shares of AIG stock rose in response to the report, jumping 6 percent, or $3.31, to close at $58.48 on Wednesday, the day after the earning statement was released. The close was a three-month high, as the stock had not achieved similar levels since mid-March.
During a conference call, AIG President and Chief Executive Officer Martin Sullivan said the first-quarter 2005 results demonstrate "the value of AIG's global diversity–both products and geography," reporting that all segments contributed to the overall increase in earnings.
In terms of underwriting profit, the p-c combined ratio was 93.4 in the quarter–98 for domestic business, and 81.6 for foreign business, he said.
Noting that loss reserves increased just over $2 billion to $49.8 billion in the first quarter, Mr. Sullivan later gave an anticipatory response to a question he knew was on the minds of investors–the question of when the previously announced reserve review would be performed.
Mr. Sullivan said that proposals from several outside actuarial firms were currently under consideration and that AIG expected to make a decision very soon, and to initiate the review shortly thereafter.
He also said work that needs to be done to address material weaknesses in financial controls disclosed earlier this year is under way. Calling it a top priority, he said AIG's chief risk officer, Robert Lewis, is leading the initiative and working alongside AIG's independent auditors to address those issues.
AIG, which is being sued for accounting fraud by the New York Attorney General's Office, has admitted to improperly documenting transactions.
Mr. Sullivan also said that AIG expects to file its second-quarter results on time, no later than Aug. 10.
Confirming some negative news, Mr. Sullivan reiterated a prior report that on the domestic life and retirement services side of the business, "certain producers are more cautious" in light of regulatory probes and negative publicity.
Asked more directly about the impact of ratings downgrades on AIG's business, Mr. Sullivan said that for general insurance (property-casualty) business, "there was generally little to no impact whatsoever."
However, "honestly, as we've disclosed, in the capital markets area the overall loss of triple-A credit rating has impacted our ability to trade in certain transactions," he said, referring to the financial products segment of the business. (AIG Financial Products operates in derivatives markets–including the equity, fixed income, foreign exchange, energy, metals, commodities and credit markets, according to information about the unit on AIG's Web site.)
Detailing what they have seen, AIG managers said that during the first quarter, although customers wouldn't call and say, "We're not dealing with you" for capital markets transactions, the company did notice that some business it thought it usually would have won had gone to other insurers at levels as competitive as AIG's. The company did not quantify how much of this financial products business was involved.
Now that all rating agencies, with the exception of Fitch, have taken AIG's ratings off credit watch, management said it was finding when it met with clients around the globe they are comfortable that "the knife has stopped falling" and they expect the financial products business to come back to AIG over time.
During the conference call, Mr. Sullivan confirmed that AIG did recently lose one foreign life insurance executive, but that he had no other major executive defections to report.
In the property-casualty segment, net premiums increased 7.6 percent to $10.8 billion, Mr. Sullivan reported, noting "downward pressure on certain commercial lines" such as property and directors and officers liability.
Reporting on D&O insurance premiums that AIG pays to cover its own officers and directors in a proxy statement filed with the Securities & Exchange Commission last Tuesday, AIG said its premium payments rose 249 percent.
The 58-page report said the company's D&O coverage for the year ending May 24, 2005 was $9.4 million. For the year ending May 24, 2006 the company said its premium was $32.8 million.
The proxy report also revealed information on executive compensation. According to the statement, former AIG head Maurice Greenberg received a salary of $1 million and a bonus of $8 million in 2004, while Mr. Sullivan received $774,963 in salary and $830,000 in bonus.
In addition, Mr. Greenberg received more than $10 million through his relationships with C.V. Starr & Co. Inc. and Starr International Company Inc. (SICO), both business entities entwined with AIG. Mr. Sullivan received more than $4 million from this relationship. Mr. Greenberg is chairman of SICO and president and CEO of C.V. Starr.
AIG said it is currently untangling these relationships with C.V. Starr and SICO. It said AIG's officers and directors no longer hold positions with either of the offshore insurers.
Mr. Greenberg also received stock options worth more than $9 million, according to the report.
Mr. Greenberg retired from AIG in March in the face of ongoing investigations
Until this report, the compensation from C.V. Starr and SICO was not revealed, and AIG said it no longer has access to the company's books, adding that the figures in the proxy report are its best estimate to date.
The company added it "intends to provide new or enhanced compensation opportunities to AIG employees in order to reflect the compensation and benefits previously provided by C.V. Starr and SICO."
Sullivan mug and quote:
The first-quarter 2005 results demonstrate "the value of AIG's global diversity–both products and geography," said AIG President and Chief Executive Officer Martin Sullivan, reporting that all segments contributed to a 44 percent jump in first-quarter income.
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