AIG CEO Optimistic on Reserve Actions, Expanded Board
February 13, 2016 by David Pilla, news editor, BestWeek: David.Pilla@ambest.com
NEW YORK – An expansion of its board of directors to include two activist investors, along with a planned resolution of prior-year losses and other property/casualty issues, will clear the way for American International Group Inc.’s efforts to streamline its operations, said the group’s chief executive officer.
“Our fourth-quarter results were impacted by our actions to strengthen reserves and lower returns on alternative investments,” said CEO Peter D. Hancock in a conference call. He noted AIG recently completed reviews of its exposures to long-tail property/casualty lines and “responded quickly to new information.”
On the investment front, he said the group “announced our intention to reduce and narrow our hedge-fund allocation, which we believe will lead to greater returns” and allow AIG to achieve its goal of returning $25 billion of capital to shareholders by the end of 2017.
According to Hancock, AIG is determined to streamline its insurance operations, as he had earlier said in a conference call on strategy as the group seeks to divest what it considers legacy businesses without losing book value (Best’s News Service, Jan. 26, 2016). Hancock added AIG announced a charge of $3.6 billion pretax in the fourth quarter for legacy and reserve issues, a point he also made in the Jan. 26 strategy call.
Ahead of its earnings conference call, AIG also said it is expanding its board of directors from 14 to 16 seats with the nomination of two activist investors, John Paulson, president of Paulson & Co., and Samuel Merksamer, a managing director of Icahn Capital LP, an entity associated with investor Carl Icahn, a vocal critic of AIG’s strategy (Best’s News Service, Jan. 19, 2016). The added candidates to the board will be included in AIG’s proxy statement for election at the 2016 AIG annual meeting set for May 11.
Hancock acknowledged the criticism of activist investors of AIG’s strategy in recent months as he commented in the decision to expand the board. “We believe this resolution is in the best interest of all our stakeholders, and most importantly allows us to focus on executing our strategic plan,” he said.
Equity analyst Josh Stirling of Sanford C. Bernstein said in a research note AIG’s decision to add Merksamer and Paulson to the board will “ensure an unshrinking advocate for shareholders’ interests that will ensure the firm delivers.” Stirling said adding activists to the board “will — at a minimum — ensure leadership’s focus and commitment on shareholder value, and provide continued pressure to deliver.”
Stirling wrote AIG’s operational plan “is a move in the right direction — and looks to us much like they are re-focusing on ‘shrinking to greatness’ in P&C.” He added “after two years in the wilderness, management’s recent plan addresses many of our concerns. Abandoning ‘OneAIG’ to refocus on ‘modularity’ will allow each business to be more focused, and with clear commitments on expenses, the company will be more aggressive in cost-cutting and more disciplined in making investments” to deliver on their streamlining plan.
AIG’s commercial insurance segment reported a pretax operating loss of $2.1 billion, compared with pretax operating income of $1.2 billion in the prior-year quarter, due mainly to a $3 billion charge for adverse prior-year loss reserve development in property/casualty and lower net investment income in property/casualty and institutional markets, as a result of lower returns on alternative investments. The increase in mortgage guaranty pretax operating income was due to higher underwriting income.
The commercial insurance combined ratio for the quarter rose to 161.5 from 103.4 a year earlier
Robert Schimek, CEO, commercial, said in the call AIG saw new business and renewal growth in certain classes of business in all lines except U.S. casualty.
Within commercial insurance, property/casualty reported a pretax operating loss of $2.3 billion, compared with pretax operating income of $935 million in the prior-year quarter, primarily due to higher net adverse loss reserve development, and, to a lesser extent, lower net investment income. Schimek said AIG saw higher severe losses and an increase in current accident year losses in U.S. commercial automobile liability and financial lines, partly offset by an improvement in specialty and lower attritional losses in property.
The segment also reported higher net adverse prior-year loss reserve development and loss reserve strengthening of $3 billion in the fourth quarter of 2015, compared with $175 million in the prior-year quarter. The reserve strengthening was mainly due to the long-tail classes of business, particularly U.S. excess and primary casualty and financial lines, reflecting adverse development on prior accident years, particularly in accident years 2010 and prior.
Schimek said part of AIG’s strategy is greater use of reinsurance, which he said makes certain lines, particularly U.S casualty, more attractive for AIG’s customers and boosts AIG’s overall strategy of achieving greater flexibility in its mix of business lines.
Consumer insurance pretax operating income fell 18% on lower net investment income driven by lower returns on alternative investments in hedge funds, primarily in retirement, and a decline in underwriting income in Personal Insurance, mainly due to less favorable net prior year loss reserve development.
Growth in Japan drove increases in both life premiums and deposits and personal insurance net premiums written compared to the prior-year quarter, excluding the effects of foreign exchange.
Kevin Hogan, CEO, consumer, said in the call AIG is optimistic about the pending integration of its two nonlife subsidiaries in Japan — AIU Insurance Co. Ltd. and Fuji Fire and Marine Insurance Co. Ltd. (Best’s News Service, May 12, 2015). Hogan said that integration is on schedule to be completed in the second half of 2016.
Personal insurance reported a pretax operating loss of $32 million, compared with pretax operating income of $121 million in the prior-year quarter, due to a decline in underwriting results and a decrease in net investment income. The personal insurance combined ratio rose to 102.7 in the fourth quarter, from 98.7 a year earlier.
Hogan said personal insurance saw growth in personal property and auto lines in Japan and the United States, offset partly by a decline in warranty service programs and accident & health. He also noted adverse prior-year development in accident & health and auto lines.
Underwriting units of American International Group Inc. have current Best’s Financial Strength Ratings of A (Excellent).
Shares of American International Group Inc. (NYSE: AIG) were trading at $52.96 on the morning of Feb. 12, up 4.83% from the previous close.