American International Group Inc. posted its fourth loss in six quarters, burned again by higher-than-expected claims costs as Chief Executive Officer Peter Hancock struggles to sustain profitability.
The net loss widened to $3.04 billion, or $2.96 a share, from a $1.84 billion, or $1.50, a year earlier, the New York-based insurer said Tuesday in a statement. The fourth quarter’s operating loss, which excludes some investment results, was $2.72 a share, missing the average estimate in a survey of 18 analysts for a profit of 42 cents.
Hancock is seeking to stabilize results by being more selective about the risks that AIG takes through both insurance underwriting and investing. He has been selling units to free up cash for shareholder buybacks and to simplify the company while focusing on the increased use of analytics to gain an edge in specialized lines, such as guarding commercial clients against cyber breaches.
“We took decisive actions in 2016 to dramatically reduce uncertainty and deliver higher quality, more sustainable earnings in the future,” Hancock said in the statement. He reiterated the two-year goal from January 2016 to return $25 billion to shareholders, adding that the commitment is “subject to regulatory and rating agency considerations and future profitability improvements.”
AIG fell 4.3 percent to $64 in extended trading at 4:59 p.m. in New York. The shares had climbed 2.4 percent this year by the close of regular trading in New York, compared with a 4.4 percent rally in the S&P 500. The insurer also trailed the index in 2016. Results were released after the close of regular trading.
AIG also announced that it increased its buyback authorization by $3.5 billion to $4.7 billion. The company repurchased more than $11 billion of stock in 2016 and another $1.2 billion this year through Tuesday, according to the statement.
S&P Global Ratings downgraded the company on Jan. 31, citing ” operational challenges” after Hancock announced earlier in the month that there was a reserve shortfall in the fourth quarter, without specifying the size of the gap. On Tuesday, the company reported a charge of $5.6 billion due to swelling claims at the commercial insurance unit.
The insurer has been suffering for years on contracts tied to workers’ compensation, commercial-vehicle coverage. Hancock announced Jan. 20 that AIG would pay about $10 billion to Warren Buffett’s Berkshire Hathaway Inc. to assume risks of further losses on some of those policies. The company said that reinsurance deal could generate a pretax gain of about $2.6 billion in the first quarter of this year.
Normalized return on equity was 4.8 percent for the fourth quarter, down from 6.6 percent in the last three months of 2015. For the full year, the figure climbed to 7.5 percent from about 6.9 percent. Hancock has announced a target of 9 percent for 2017. Investor Carl Icahn had faulted the CEO for failing to hit 10 percent, before the activist billionaire’s firm won board representation last year.
Hancock became CEO in late 2014 after previously running the property-and-casualty business since 2011.
Book value, a measure of assets minus liabilities, was $76.66 a share at the end of December, compared with $85.02 three months earlier. Large insurers including MetLife Inc. and Prudential Financial Inc. endured declines in the period as higher interest rates pushed down the market price of bond holdings.
The pretax operating loss at the commercial unit run by Rob Schimek widened to $5.02 billion from $2.43 billion a year earlier, pressured by the reserve charge. The division under Schimek has been shrinking, partly through reinsurance deals and also through sales of assets such as a mortgage guarantor and businesses in Brazil and Turkey. Policy sales dropped 20 percent to $3.7 billion.
At the individual retirement business overseen by Consumer Insurance CEO Kevin Hogan, pretax operating profit advanced 37 percent to $542 million, while group retirement rose to $261 million, from $228 million. The life segment posted a loss of $10 million, compared with a profit of $24 million in the last period of 2015. The contribution from personal insurance was $176 million, compared with a $27 million loss in the year-earlier period.
Net investment income, which includes results from various units on a bond-dominated portfolio, climbed 13 percent to $3.59 billion from $3.18 billion, according to a supplemental filing on AIG’s website. Chief Investment Officer Doug Dachille last year slashed some poorly performing hedge fund holdings and shifted funds to wagers on U.S. mortgages.
Private equity and hedge funds combined contributed $314 million.
Addendum: IJ.com excerpts from AIG’s financial reporting:
“We took decisive actions in 2016 to dramatically reduce uncertainty and deliver higher quality, more sustainable earnings in the future,” said Peter D. Hancock, AIG president and chief executive officer. “The comprehensive adverse reserve development cover significantly reduces the risk of further reserve additions in some of the most volatile lines, and we responded definitively to emerging severity trends that we believe are materially impacting the overall U.S. Casualty market. Going forward, we expect to see the results from our improved underwriting platform, reduced expense base, and the strong improvement in our business mix. We remain committed to continuing to execute our clearly defined transformation plan, as well as achieving our financial goals, including the return of the remainder of the $25 billion to shareholders we announced in January of last year subject to regulatory and rating agency considerations and future profitability improvements.”
Commercial Insurance Highlights – In 2016, the Commercial Insurance business demonstrated clear underwriting conviction to improve its overall mix of business and utilize more rigorous pricing tools in U.S. casualty lines, which has been the primary driver of recent adverse development. The experience in U.S. Casualty reflects aggregate exposures that have accumulated over AIG’s decades of underwriting long-tail business. The net premiums written associated with those lines have declined approximately 39% since the end of 2015, and the adverse development reinsurance agreement covers the majority of the U.S. Casualty reserves.
- Commercial Insurance net premiums written decreased by 20.2% in the fourth quarter as a result of strategic portfolio actions and premiums ceded under the previously announced Swiss Re quota share transaction. For the full-year 2016, net premiums written declined 17.9% driven by the strategic remediation of certain underperforming casualty lines as well as greater use of reinsurance.
- The loss ratio was 211.5 in the quarter and included 125.2 points attributable to prior-year adverse reserve development and 8.1 points attributable to catastrophe losses. The accident year loss ratio, as adjusted, was 78.2, and included a 10.8 point increase arising from the impact of the reserve studies on premiums earned in the first three quarters of 2016. The full-year 2016 loss ratio was 104.0 which included 30.8 points of adverse reserve development. The accident year loss ratio, as adjusted, for 2016 following the fourth quarter reserve strengthening was 66.7, representing a 4.1 point improvement compared to the 2015 ratio inclusive of the impact of the 2016 reserve strengthening on 2015 results.
- The expense ratio was 30.1 in the fourth quarter, flat compared to the prior year quarter as improvements in general operating expenses and ceding commissions received from reinsurers were offset by the strategic decline in premiums. For the full-year 2016, the expense ratio improved by 0.9 points driven by lower general operating expenses and higher ceding commissions received from reinsurers.
Substantial Strengthening of Reserves – The fourth quarter included a $5.6 billion or ($3.56) per share impact from prior year adverse reserve development. Total full-year 2016 adverse development on subject lines of $5.3 billion is included under, and will be 80%, or $4.2 billion, covered by the adverse development reinsurance agreement with National Indemnity Co. This agreement covers roughly half of total Commercial Insurance loss reserves at
the company and should generate a deferred pre-tax gain before discounting of approximately $2.6 billion in the first quarter of 2017.