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No quick fix for what ails AIG

Posted On: Feb. 16, 2016 12:00 AM CST

Some equities analysts doubt that the underlying factors that played a key role in American International Group Inc.'s fourth-quarter 2015 performance can be remedied anytime soon.

Losses in its commercial property/casualty business helped push AIG to a net loss of $1.84 billion in the final quarter of last year from a net gain of $655 million a year earlier, the New York-based insurer said last week.

“Commercial insurance reported a pretax operating loss of $2.1 billion compared to pretax 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,” AIG said in a statement.

At the same time, AIG said it would expand its board to 16 members from the current 14 by nominating John Paulson, president of Paulson & Co., and Samuel Merksamer, a managing director of Icahn Capital L.P., as new members at its annual meeting this year.

The head of Icahn Capital, Carl Icahn, has sharply criticized AIG's management and called for splitting the company into separate entities — property/casualty, life and mortgage insurance — to increase shareholder value and AIG from the federal government's list of nonbank systemically important financial institutions.

One of three insurers designated as SIFIs, AIG is subject to enhanced federal oversight and reporting requirements, the cost of which AIG President and CEO Peter Hancock last month estimated at $100 million to $150 million annually.

AIG has announced plans to streamline its operations by putting as much as 19.9% of its mortgage insurance unit up for an initial public offering this year with an eye to selling it all eventually. AIG has also entered into an agreement to sell its broker-dealer AIG Investor Group.

The fourth quarter of 2015 “was very weak across the board,” Meyer Shields, a managing director at Keefe Bruyette & Woods Inc. in Baltimore, wrote in a research note. Some aspects “reflect fundamentally weak businesses that either need dramatic corrective action or should be shuttered entirely. Despite our doubts about whether rapidly breaking up AIG is realistic, we applaud the proposed nomination of John Paulson and Samuel Merksamer to AIG's board, since we think investors can now anticipate welcome impatience for any complacency in the guise of long-term thinking.”

“We have assumed 5% to 10% P/C net premium volume reductions per the company's reunderwriting strategy,” Cliff Gallant, an analyst at Nomura Securities International Inc., wrote in a research note. “Given the reserve charge, including additions to recent accident years, and the difficult operating environment, we remain skeptical in regard to material loss ratio improvement.”