AIG Reins In Goals, Hitting Stock -- WSJ
February 16 2017 - 3:03AM
Dow Jones News
By Leslie Scism
American International Group Inc.'s turnaround plan took a hit
after disappointing fourth-quarter earnings sent its shares
tumbling 9%.
The insurance giant told analysts that it will now be more
difficult to meet two important year-end targets for improving
profitability in the company's core unit of selling
property-casualty policies to businesses. It also surprised Wall
Street with a $5.6 billion addition to reserves that was larger
than anticipated.
"There is a question, to what degree has this turnaround
stalled? To what degree is the progress sliding backward?" said
Cathy Seifert, an equity analyst with CFRA Research. "It speaks to
credibility. There was an agenda set out a year ago, and they
haven't hit all the targets."
The stock's 9% drop, to $60.85, was its biggest percentage
decline since August 2011. AIG was the day's worst performer in the
S&P 500.
AIG nearly collapsed during the 2008 global financial crisis and
needed a $185 billion bailout to keep going. Now, Chief Executive
Peter Hancock is trying to sell businesses, reduce expenses and
make big changes in the insurance products it sells in a bid to
boost profitability. It is trying to satisfy activist shareholders
Carl Icahn and John Paulson, who have publicly called for AIG to
break into smaller pieces.
AIG added Mr. Paulson and a representative of Mr. Icahn to its
board last spring. Mr. Paulson's hedge-fund firm, Paulson &
Co., disclosed Tuesday that its holdings of AIG dropped to 4.8
million shares as of Dec. 31, compared with roughly 9 million on
Sept. 30.
A key part of Mr. Hancock's turnaround plan is a set of
profitability targets announced in January 2016 designed to bring
AIG's results in line with the best of its rivals. Among those
goals was an underlying 10% return on equity on its core business
by year-end.
But on Wednesday, it reduced that target to 9.5%. Return on
equity reflects profits earned against capital invested in the
business.
AIG also said it would take beyond 2017 to meet another closely
watched goal: a reduction in the "loss ratio" on business-insurance
policies to levels achieved by its most-profitable peers. A loss
ratio is the amount of each premium dollar paid on claims and
related expenses.
AIG's goal was about 60 cents per dollar at year-end, but it
said it now is targeting 62 cents. That contrasts with the 65 cents
that AIG was paying two years ago.
Mr. Hancock reiterated a pledge started last year to return $25
billion to shareholders by the end of 2017 through buybacks and
dividends. AIG was more than halfway to that goal through Tuesday.
But the company emphasized in the earnings and a subsequent
conference call that reaching $25 billion is still subject to
regulatory approvals, discussions with ratings firms and "future
profit improvements."
The $5.6 billion reserve boost follows a $3.6 billion addition
in the year-ago quarter. Mr. Hancock and other executives cited
"emerging trends" and new claims data for the large jump.
They specifically cited worsening trends in vehicle wrecks that
affect policyholders' fleets of commercial vehicles, more-expensive
medical-malpractice claims and financial-crisis-related liability
claims that are costing more than expected.
AIG said that much of the latest reserve addition would be
covered under a reinsurance agreement with Warren Buffett's
Berkshire Hathaway Inc. that was announced last month. The
agreement would reduce AIG's exposure to such charges going
forward, Mr. Hancock said.
Write to Leslie Scism at leslie.scism@wsj.com
(END) Dow Jones Newswires
February 16, 2017 02:48 ET (07:48 GMT)
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