Poor underwriting and investments cost AIG $1.8BN in Q4

The insurer recorded a net loss of $1.8 billion during the last stretch of 2015, attributed to “adverse loss development”

Insurance News

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Amid pressure from investors to split, American International Group announced a slump in performance during last year’s fourth quarter.

According to the company’s report, poor underwriting and investment returns caused AIG suffered an operating loss of $1.3 billion during Q4 2015, compared to operating income of $1.4 billion during the same period last year. Its property/casualty segment, meanwhile, reported a $2.3 billion loss.

The insurer also reported a net loss of $1.8 billion, compared to net income of $655 million during Q4 2014.

Full year results include an after-tax operating income of $2.9 billion, down from $6.6 billion in 2014. Net income also fell more than 70% from $7.5 billion last year to $2.2 billion in 2015.

The losses follow a $231 million slump in 2015’s third quarter, after which AIG promised to up its efforts to improve results for shareholders through slashing 400 senior level positions.

It was also at that time that activist investors John Paulson and Carl Icahn began advocating splitting AIG into three separate companies to improve results and avoid a Systemically Important Financial Institution designation from the federal government, which would subject the company to additional oversight.

Though AIG CEO Peter Hancock has resisted these efforts – instead announcing a plan to return $25 billion to shareholders by 2017 through streamlined operations and exits from some business lines – he announced the appointment of Icahn and Paulson representatives to AIG’s board as a settlement with the activists.

Hancock says the company has made a strong start in returning to profitability despite the recent losses.

“We’re working to become our clients’ most valued insurer and have a clear plan to maximize shareholder value that balances the interests of all of our stakeholders, including shareholders, debt holders, rating agencies, customers, employees and regulators,” Hancock said in a statement.

He also stressed the return of almost $12 billion to shareholders in the form of share repurchases and dividends in 2015, and the purchase of another $2.5 billion of outstanding AIG common shares in February.

However, analysts have expressed doubt that these actions appropriately address the underlying issue of poor underwriting – one of the reasons for AIG’s fourth quarter losses.

“The company is showing incremental urgency and is clearly listening to its shareholders, but its efforts appear to stop short of being radical or transformational,” Sanford C. Bernstein analyst Josh Stirling wrote in a note to clients in late January.

“Sadly, this was not the ‘big bang’ from management we suspect most shareholders were hoping for.”

Stirling added that “a more radical breakup” is needed both to “tame its underwriting and expense problems” and to get out from under the thumb of federal regulations applying to SIFI-designated companies, otherwise known as “too big to fail” companies.
 

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