AIG Posts Loss on Large Charge to Boost Reserves -- Update
February 14 2017 - 6:46PM
Dow Jones News
By Leslie Scism
American International Group Inc. posted a $5.6 billion pretax
charge to boost its claims reserves, larger than expected and
leading to one of the company's worst quarterly results since the
financial crisis.
Even as AIG posted a $3.04 billion net loss, or $2.96 a share,
its board announced a $3.5 billion additional share-buyback
program, testimony to strong results in many other parts of the
company. Operating profit for its consumer-insurance businesses
jumped 56% to $969 million.
The additional share repurchasing keeps AIG on track to return
at least $25 billion in capital to its shareholders in 2016 and
2017.
AIG set up the aggressive capital-return program as a
centerpiece of an effort to improve results amid pressure from
billionaire investors Carl Icahn and John Paulson to break up. Mr.
Paulson and a lieutenant for Mr. Icahn now sit on AIG's board.
AIG alerted investors to a material fourth-quarter charge in
announcing a reinsurance agreement last month, with Warren
Buffett's Berkshire Hathaway Inc., without disclosing the dollar
amount. Under the pact, one of the largest ever of its kind, AIG is
paying Berkshire roughly $10 billion. Most of the cost of AIG's
reserve charge will be covered under the agreement.
At $5.6 billion, the reserve boost was far larger than estimated
by Wall Street analysts.
It comes after a $3.6 billion before-tax reserve boost in the
year-earlier quarter that some thought had brought the reserves to
an ample, conservative level.
The large size of this new charge may shake the confidence of
some investors and sets the stage for analysts to grill the company
in its Wednesday earnings call.
Peter Hancock, AIG's chief executive officer, said in the
earnings release that the company had "responded definitively to
emerging severity trends that we believe are materially impacting
the overall U.S. casualty market."
He said the Berkshire reinsurance deal, meanwhile,
"significantly reduces the risk of further reserve additions in
some of the most volatile lines."
Reinsurers take on responsibility for some claims' costs of
policies sold by primary insurers.
The company said the charge pertains to an array of insurance
policies sold to business clients as far back as decades and as
recently as 2016.
The Berkshire pact covers such product lines as workers'
compensation, directors' and officers' liability, professional
indemnity, medical malpractice, commercial automobile and some
other liability policies.
In other parts of its profit-improvement effort, AIG said its
expense reductions were running ahead of schedule. Net premiums
written in its commercial-insurance business decreased 20% as a
result of another reinsurance pact, with Swiss Re, and deliberate
shrinkage to get out of certain poorly performing casualty
lines.
The largest profit-generating part of AIG's consumer operations
was its retirement-income annuity business, with $542 million in
profit.
AIG said it returned $13.1 billion to shareholders in 2016 and
has bought back $1.2 billion of stock so far this year.
For the year-earlier quarter, AIG posted a net loss of $1.84
billion, or $1.50 a share.
Write to Leslie Scism at leslie.scism@wsj.com
(END) Dow Jones Newswires
February 14, 2017 18:31 ET (23:31 GMT)
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