In its focus to pare down its outstanding debt portfolios, AIG reported an almost 67% reduction in profits in its Q4 report, as compared to the same period in the previous year. The focus on trimming its debt size and to build on its existing cash reserves took the shine out of its Q4 profits. AIG’s fourth quarter earnings were along expected lines as the decision to pare down its debts had come much earlier. The fall in profits meant that the net income dropped down to a mere $655 million as compared to $1.98 billion for the same period last year. Also, as compared to last year’s per share profits of $1.34, this year’s Q4 profit per share came down to only $0.46.
This fall in profits also resulted in a deviation from the projections estimated by 22 analysts’. Compared to the analysts’ projection of an average of $1.06 per share, the operating profit as reported by the New York based insurer was lesser by 9 cents and stood at $0.97. This slight deviation is not remarkable, however, if viewed in the context of the massive 67% drop in the profits earned.
Despite such fall in profits and profit per share values, Peter Hancock remained bullish in his outlook and projections for the future growth of the company. The conference call transcript that is available online also highlighted a stock buyback program and the willingness to add to its cash reserve account owing to a continuously falling interest rate regime. This fall in profits was attributed by the CEO, to AIG’s debt extinguishment strategy that saw a $834 million outflow. The CEO, during Friday’s conference call with AIG’s analyst also explained how the debt extinguishment, in reality, provided a $0.5 billion ‘incremental economic value’ to shareholders after AIG consolidated its fundamentals by paring debt.
Mr. Hancock also admitted that, despite such positive outlooks for the future, AIG was wary of the challenges that it may have to face owing to the current low-interest rate environment. The last time AIG had to face such a low interest rate environment, it was forced to generate incomes from insuring debt defaults by sub-prime lenders, which ultimately had led to the worldwide global recession. In the face of past lessons learnt, AIG may be extremely cautious in repeating the same mistakes as had been committed earlier and therefore, the current low interest environment becomes a far difficult challenge to overcome, than before.