AIG Earnings Takeaways: Cost Cutting, Restructuring Expected
AIG (NYSE:AIG) reported earnings for the third quarter of 2015 on November 2, slipping back to loss after a couple of profitable quarters. For the third quarter, AIG reported a loss of $231 million compared to net income of $2.2 billion a year ago. ((AIG Reports Third Quarter 2015 Results, $0.5 Billion in Restructuring Charges to Simplify Organization, Improve Efficiency and Rationalize Businesses, AIG Investor Relations)) AIG suffered mostly due to lower income on hedge fund investments, adversely impacted by volatile markets as well as weak business performance in the property and casualty (P&C) segment.
We have a price estimate of $64 for AIG’s stock, which is almost in line with the current market price.
See our complete analysis of AIG here
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Property And Casualty – Underwriting Concerns, Weak Business
AIG ranks among the top ten P&C insurers in the U.S. with a market share of 3.9% in terms of premiums earned. [1] During the third quarter, a 34% y-o-y decline in investment income led to a 40% year-over-year (y-o-y) decline in pre-tax operating income from the division. Increased underwriting losses, operating expenses and acquisition costs led to a higher combined ratio – the ratio of claims and expenses paid to premiums earned – which climbed from 102.2% las year to 102.7% in the third quarter.
AIG’s continuing efforts to optimize its P&C portfolio in the U.S. weighed on premium growth. Additionally, FX headwinds led to a 6% y-o-y decrease in net premiums written in the segment during the third quarter. [2]
Life And Retirement
Lower investment income and weak performance of hedge funds investments led to a considerable fall in earnings from AIG’s life and retirement segment. During the third quarter, AIG’s pre-tax operating income from the retirement guarantees business fell 42% y-o-y to $635 million, while in the life insurance segment the company reported a loss of $40 million compared to $50 million pre-tax operating income a year ago. Additionally, higher benefits and claim-related expenses and modifications to actuarial assumptions added to the woes for the company’s earnings from the life and retirement businesses during the third quarter.
What Lies Ahead
Owing to its up and down nature over the past several years, and the prolonged turnaround time, AIG’s shareholders seem to have grown impatient, especially, after the weak third quarter performance.
Three Way Split Or Sell-Off
To start, there is considerable pressure from AIG’s shareholders, prompted by Carl Icahn, for AIG to split into three different companies – with the P&C, life and retirement and mortgage guarantees businesses separating. [3] Another possibility is that AIG could focus on one or two core businesses and sell off the P&C operations worldwide. ((Hot M&A Market Prompts AIG Bull to Propose Sales Instead of Spin-Offs, Wall Street Journal)) Especially in a busy M&A market in the P&C category, AIG could actually cash in fairly well. In early July, P&C insurer ACE ltd. agreed to buy Chubb for $28.3 billion, in what is described as the largest merger in the industry. [4] The combined entity is set to become the sixth-largest company in the P&C space in the U.S. Further consolidation is likely, so AIG would likely see demand for its various businesses should it decide to sell any of them.
Cost Cutting, Job Cuts, More Investments In IT
AIG is also facing pressure to cut costs more effectively as its margins shrink. The company has already announced plans to cut as many as 400 senior level jobs, meaning nearly one-fifth of the company’s senior level workforce. Also as part of the restructuring plan, the company is planning to increase its investments in IT to improve operating efficiency. These measures, in addition to severance cost improvements, could bring in estimated savings of $400-500 million for AIG.
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