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AIG faces up to past losses, future challenges as break-up pressure mounts

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Poor commercial property/casualty insurance results helped push American International Group Inc. to a net loss of $1.84 billion during the fourth quarter of 2015 from a net gain of $655 million during the same period a year earlier, the New York-based insurer said Thursday.

At the same time, AIG conceded to pressure from activist shareholder Carl Icahn and added board seats for his allies.

“Commercial Insurance reported a pre-tax operating loss of $2.1 billion compared to pre-tax operating income of $1.2 billion in the prior-year quarter, primarily driven by the previously announced $3.0 billion charge for adverse prior year loss reserve development in property casualty and lower net investment income in property casualty and institutional markets,” said an AIG statement announcing its results. Catastrophe-related losses also jumped to $213 million in the fourth quarter from $35 million during the corresponding period in 2014.

Commercial insurance's combined ratio in the fourth quarter deteriorated to 161.5% from 103.4% posted during the fourth quarter of 2014. Net written commercial insurance premiums declined 1.9% to $4.60 billion.

For 2015 as a whole, net income dropped 70.8% to $2.20 billion. Net written commercial premiums dropped 2.8% to $20.44 million and the combined ratio deteriorated to 115.0% from 100.2%.

The results came as AIG has faced pressure from investor Carl Icahn and others to split into three companies — life, property/casualty and mortgage insurance — to increase shareholder value and to get AIG off the list of systemically important financial institutions. AIG is one of three insurers — MetLife Inc. and Prudential Insurance Co. being the others — designated as SIFIs and thus subject to increased federal oversight. MetLife is currently challenging the designation in court, where proceedings began this week.

AIG announced recently that it would put up to 19.9% of its mortgage insurance business on the market in an initial public offering later this year, with an eye to selling off the entire business.

Along with its earnings announcement, AIG said Thursday that it was expanding its board of directors to 16 members from 14. The two new members it will nominate are John Paulson, president of Paulson & Co., and Samuel Merksamer, a managing director of Icahn Capital L.P.

Mr. Icahn posted a statement on his website noting the agreement with AIG under which the two new board members would be nominated, adding that he declined to go on the board because of his “involvement with so many other companies at this time.”

“We welcome John Paulson's addition to the board and believe his involvement will be additive, especially in that we both have stated the same goals for AIG,” Mr. Icahn wrote. “We commend the board for adopting a number of our recommendations over the last few months. We continue to believe that smaller and simpler is better and look forward to working collaboratively with the board and management to help catalyze a turnaround in core (property/casualty) operations, a more transparent operating structure, and the ultimate shedding of the SIFI designation. We believe that AIG stockholders will benefit from our agreement.”

During an earnings call Friday, AIG President and CEO Peter Hancock said he was “pleased we have reached a solution” that avoids a “distracting” proxy fight at the AIG's annual meeting later this year.

He said that AIG has already taken steps to become a more “streamlined” company. These included a reduction in the ranks of senior management by more than 20% announced late last year and the announced sale of part of its stake in Chinese insurer PICC Property and Casualty Co. Ltd. Last month, AIG also announced that it had reached an agreement to sell its broker-dealer AIG Advisor Group for an undisclosed sum.

“We stand by our plan” to cut costs and to improve the company's performance, said Mr. Hancock Friday.

“The company'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 property/casualty,” said Josh Stirling, a senior analyst at Sanford C. Bernstein & Co. L.L.C. in New York in a note. “Though we have been more a critic of management than most, after two years in the wilderness, management's recent plan addresses many of our concerns.”

Mr. Stirling also viewed the addition of the new board members as a positive step.

“Adding activists to the board will — at a minimum — ensure leadership's focus and commitment on shareholder value, and provide continued pressure to deliver,” he wrote. “But more importantly, letting the activists behind the curtain will allow them to engage with the full board — and a full set of nonpublic financials — to both challenge management's plan, as well as explore other strategic alternatives — like more aggressively selling assets, and pursuing an explicit plan to de-SIFI.”