AIG Earnings Takeaways: Misses Estimates, Stock Rises On Dividend Increase And Agreement With Icahn

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AIG
American International Group

AIG (NYSE:AIG) reported disappointing fourth quarter results last week with an after-tax operating loss of $1.10 per share compared to 97 cents a share in the prior year quarter. The loss was also considerably higher than analyst consensus estimates of 93 cents a share and it was primarily driven by lower income on hedge fund investments and the company’s efforts to strengthen its reserves. ((AIG Reports Fourth Quarter 2015 Results, AIG Investor Relations)) However, the stock was up after the earnings release on other important developments, including an increase in quarterly dividend by 14% to 32 cents a share, and a truce between AIG and activists to turn around the company’s core P&C operations which translated into two board member seats to activist investors Icahn Capital LP (Samuel Merksamer) and Paulson & Co. Inc. (John Paulson).

We are in the process of updating our $64 price estimate for AIG’s stock.

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See our complete analysis of AIG here

Property And Casualty – Underwriting Concerns

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 fourth quarter, a $3 billion underwriting loss and 34% y-o-y decline in investment income led to a pre-tax operating loss of $2.3 billion compared to a profit of $935 million in the prior year quarter. Increased underwriting losses and acquisition costs, partially offset by slightly lower expenses, led to a higher combined ratio-  the ratio of claims and expenses paid to premiums earned – which climbed from 103.4% in Q4 2014 to 161.5% in Q4 2015.

Net premiums written increased by 2% y-o-y on a constant currency basis due to growth in new businesses. On a reported basis, net premiums written declined by 2% over the prior year quarter.

Life Insurance Profit Up

Lower investment income due to weak performance of hedge fund investments led to a considerable fall in earnings from AIG’s  retirement segment. During the fourth quarter, premiums fell 38% to 41 million and pre-tax operating income fell 17% y-o-y to $600 million in the retirement guarantees business.

In the life insurance business, the company reported a pre-tax operating profit of $185 million compared to a profit of just $80 million in the prior year quarter. This was primarily driven by a $104 million charge in Q4 2015 to increase reserves for incurred but not reported death claims for some small policies.

Activist Investors On AIG’s Board

Owing to AIG’s poor recent performance in the P&C business and its prolonged turnaround time, AIG’s shareholders had grown impatient, especially after the weak third quarter performance. There was a lot of pressure on the company’s management to take some strong strategic actions to increase profitability as well as improve shareholder value. Investors Carl Icahn and John Paulson had called for breaking AIG into three companies to improve operations and generate better returns for shareholders.

In response, AIG released a strategic update earlier this year which called for returning $25 billion to shareholders over the next two years; an IPO of up to 19.9% of United Guaranty Corporation, AIG’s mortgage insurance business, in mid-2016 as a first step towards a full separation; sell AIG Advisor Group to Lightyear Capital LLC and PSP Investments; and reduce operating expenses by $1.6 billion over the next two years.

These proposals failed to fully convince the investors then, but AIG has been able to reach an agreement with them now. The agreement provides for two seats on the company’s board for both Icahn Capital LP and John Paulson. In return, both Icahn and Paulson have agreed to work collaboratively with AIG’s board and not go against them publicly. This is a welcome development and should be a win-win for both the company and shareholders – in turning around the P&C operations as well as maximizing return on equity and shareholder value. We will keep a keen eye on the developments. [2]

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Notes:
  1. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2014 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM []
  2. Agreement With AIG, CarlIcahn.com, Feb 11 2016 []