Equity Analysts See Uncertainty in AIG’s CEO, Strategy Choices After Hancock’s Exit
March 12, 2017 by David Pilla
NEW YORK – The day after Peter D. Hancock’s announcement he is stepping down as president and chief executive officer of American International Group Inc., equity analysts say it was a quick, but unsurprising, move by AIG as Hancock is being ousted from the multiple-line insurer halfway through a two-year strategic turn-around effort.
Hancock is staying on until AIG finds a new CEO, but analysts also say there is a lot of speculation around who the new chief might be and what the choice says about the multiple-line insurer’s strategy.
“It had become abundantly clear to us from dialogue with investors” since the release of AIG’s fourth-quarter earnings Feb. 14 “that the overwhelming majority of investors felt change was absolutely needed at the top of the organization,” said equity analysts Ryan Tunis and John Nadel at Credit Suisse in a research note. “Clearly, CEO Peter Hancock and the board heard the same.” The note said investors “are likely to express some skepticism about the scope of possible CEO replacements that would want to run AIG.”
Rob Haines, senior research analyst with financial research firm CreditSights, told Best’s News Service “it might have been inevitable that (Hancock) would have to go eventually as someone has to be held accountable.” He added Hancock had led AIG’s property/casualty operation before becoming CEO of the group in 2014, and “there had been some missteps” in that segment, but he said “not all of AIG’s problems could be laid at Hancock’s feet.”
Hancock said in memo to AIG employees he will stay on as CEO until a successor has been named (Best’s News Service, March 9, 2017). Tunis said in his note he expects AIG will hire “a seasoned industry veteran from outside the organization” to lead the company.
According to Haines, AIG’s next CEO is “going to have a difficult road ahead” as the group’s property/casualty problems will not go away soon.
Tunis and Nadel wrote “while the list of candidates may seem small at first blush, three items may ‘entice’ potential leaders: the fact that other non-property/casualty AIG businesses have been on a good path over the past few years, which allows for a more limited commercial P&C focus”; the $9.8 billion Berkshire Hathaway cover that that works to protect return on equity goals from legacy reserve problems; and the fact AIG is “far simpler” on the property/casualty side today than it was several years ago “with a large portion of the problematic P&C lines remediated or exited.”
In AIG’s earnings conference call in February, Hancock said the insurer was looking to get away from troublesome casualty business through a “radical shift of the business mix” as the group unveiled $5.6 billion in charges on prior-year casualty reserve development on top of an earlier $9.8 billion adverse development cover agreement with Berkshire Hathaway’s National Indemnity Co. (Best’s News Service, Feb. 15, 2017).
Tom Russo, AIG’s former general counsel, said the insurer’s strategy will remain the same following Hancock’s decision to leave. “The strategy is going to end in less than a year so I don’t think the board is going to change that,” he said.
Russo, who retired in November 2016 from AIG, said “the more important thing is what the strategy is going to be after next year.”
He said it was a “bad decision” to have Hancock resign at this time because the current strategy has yet to run its course. Russo added “it took a lot of courage” for Hancock to address the $5.6 billion prior-year development numbers in the fourth-quarter results as acknowledgment of what he was facing. Russo said “I think a lesser man would have taken a softer view” on how to deal with those prior-year numbers, he said.
According to Haines, the Berkshire Hathaway deal “can be seen as a positive step if it further reduces the volatility” in AIG’s property/casualty operations.
Citing the $5.6 billion charge, Tunis and Nadel wrote the “underwriting quality has not improved sufficiently at AIG.”
Douglas M. Steenland, AIG’s board chairman, said in a statement announcing Hancock’s decision to leave that Hancock developed the two-year strategic plan, which the board believes “is the right plan” to which the board “remains committed to the financial targets and objectives we’ve announced.” Steenland said the board “recognizes the value of the combined strength of AIG’s consumer and commercial franchise, and the capability of this management team.”
Haines said he “was a little bit surprised that Hancock didn’t get a little more time to execute his plan,” given AIG is about halfway through the turnaround strategy unveiled in 2016 (Best’s News Service, Jan. 26, 2016).
Credit Suisse’s Tunis and Nadel noted Steenland’s comment apparently means “it would appear a break-up of the company remains unlikely, although that certainly remains to be seen depending upon the successor and his view of the best strategic course of action for AIG longer-term. Regardless, we expect investors will begin the analysis in earnest of the break-up value of AIG.”
Haines said he doesn’t think a split-up of the group is likely in the near term. A loss of diversification advantages and tax implications are among the reasons a break-up of AIG isn’t seen as the way forward from the point of view of some investors, he said.
According to Haines, any break-up effort at this time will lead to “heightened uncertainty” regarding AIG’s future.
AIG had been under pressure from key investors even before AIG’s new strategy was unveiled in January 2016. Hancock’s strategy comments at the time were in part an answer to investor Carl Icahn, who has been pressing for a breakup of AIG’s businesses (Best’s News Service, Jan. 19, 2016). Icahn had published an open letter to AIG’s board of directors calling for AIG to split up.
Underwriting entities of American International Group Inc. have current Best’s Financial Strength Ratings of A (Excellent).
Shares of AIG (NYSE: AIG) were trading at $63.13 on the afternoon of March 10, down 0.13% from the previous close.
(By David Pilla, news editor, BestWeek: David.Pilla@ambest.com)
