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Analysts look to the future of AIG

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After reviewing American International Group Inc.’s big third-quarter 2017 loss, which included an $837 million addition to prior-year loss reserves, several investment analysts indicated they had underestimated the problems the insurer had previously faced.

In a series of research notes published after AIG's results conference call on Friday, however, the analysts said they had confidence in the insurer’s new management team to improve results.

AIG published a worse-than-expected $1.74 billion third-quarter loss last week. In the call with analysts, AIG President and CEO Brian Duperreault said the quarter marked a “base” from which it would grow profitably. Mr. Duperreault said that going forward, the insurer would focus more on technical underwriting, and that 2018 would be “the year of the underwriter.” In addition, AIG, which has announced several organizational changes since he took over in May, would “return to a discipline of specialization in how we run our businesses,” refocus its surplus lines operation, and buy more reinsurance, he said.

In a note to investors Sunday, analysts at Keefe, Bruyette & Woods Inc. said AIG’s third-quarter results report “finally presents an accurate depiction of how bad its commercial underwriting results had gotten under its previous senior management; our job was to detect that, and we failed to do so. We expect its much more capable current — plus developing — team to drive steady improvement in coming quarters and years.”

Mr. Duperreault, who worked at AIG in the 1970s and 1980s before leaving to run Ace Ltd. and later Marsh & McLennan Cos. Inc., took over the top job from Peter Hancock, who announced his resignation in March after AIG posted a nearly $3 billion fourth-quarter 2016 loss. Since rejoining AIG, Mr. Duperreault has made several senior management changes, including bringing in former Marsh & McLennan colleague Peter Zaffino to run the property/casualty operations.

Mr. Duperreault’s “history of underwriting success” and his experience running a brokerage should lead to improved underwriting results and a better understanding of how AIG can work with agents and brokers, the KBW note said.

In a note issued on Friday, analysts at Credit Suisse Securities (USA) L.L.C. also acknowledged that AIG’s previous management may not have taken sufficient measures.

“At face value, we read this quarter's reserve actions as a partial rebuttal to our thesis that previous management left AIG (property/casualty) in somewhat better condition than perceived by the market, though the rebuttal is not complete,” the note said.

In a follow-up note after the call, the Credit Suisse analysts said AIG’s reserve position may not yet be fully settled: “Even though we are incrementally more confident that 4Q reserve activity will be muted following the call, this probably won't be the last quarter where reserves are a key topic.”

In its note on the results after the call on Friday, Morgan Stanley & Co. L.L.C. said: “After (the) 3Q setback, we remain confident in AIG's turnaround story. We believe the new management has the ability and sense of urgency to improve commercial line profitability.”

Morgan Stanley said the new management is focused on underwriting and will likely be willing to reject unprofitable accounts.

Hardening property insurance rates could also help improve results, the note said.

“The turnaround could take time, but we remain confident in the execution,” the Morgan Stanley analysts said.