Insurance giant American International Group (NYSE:AIG) has come a long way since its bailout at the hands of taxpayers during the financial crisis. After having once been a sprawling financial empire with a wide swath of different businesses, AIG has taken the past several years refocusing its efforts on its most profitable business opportunities, following rivals like Travelers (NYSE:TRV) into a greater emphasis on its core property and casualty business.
Coming into Thursday's fourth-quarter financial report, AIG investors were prepared for a sizable quarterly loss, but the amount of red ink AIG suffered was quite a bit greater than what they were expecting to see. Nevertheless, moves to boost its dividend, buy back shares, and name John Paulson and a representative from Carl Icahn's investment firm sent shares skyward. Let's look more closely at the latest numbers from AIG to see what we can learn about the insurance giant's future.
Behind AIG's big loss
AIG's fourth-quarter results were worse than investors were prepared to see. On a reported basis, the company lost $1.8 billion, and even using its more favored adjusted after-tax operating income metric, its loss of $1.4 billion, or $1.10 per share, was substantially worse than the $0.93 per share loss that most investors were looking to see. It blamed the loss on adverse loss reserve development and lower returns on alternative investments.
Its major segments saw disparate performance. The commercial insurance side took the brunt of the damage, posting a $2.1 billion pretax operating loss due almost entirely to a $3 billion charge for adverse loss-reserve development in the prior year for AIG's property and casualty business. For the P&C business, premiums written fell 2%, and the combined ratio skyrocketed to 161.5, reflecting the charge as well as a jump in catastrophe-related losses to $213 million. The mortgage guaranty business saw lower premium volume but a slight uptick in operating profits, but the institutional markets subsegment suffered a 72% drop in pretax operating income.
Meanwhile, the consumer insurance segment remained profitable on a pretax basis, although it did take an 18% hit to its bottom line. Lower investment income from the retirement products, life insurance, and personal products lines all contributed to the sluggish performance. Investment income struggles have hit the entire industry, and Travelers has also seen the impact in its operations. Overall, the strong dollar weighed on AIG's premium growth.
AIG CEO Peter Hancock put the company's loss in perspective. "At the beginning of 2015," Hancock said, "we embarked on a three-year plan to transform AIG. Over the past year, we have been implementing our strategy and made significant progress toward our objectives." The CEO also pointed to cost containment as a key element of future financial strength.
How AIG is moving forward
Overshadowed in the earnings report, though, were releases from AIG on two different matters. First, the company announced its capital allocation strategy for 2016, which includes not only a higher dividend but also additional share repurchases. AIG authorized a new buyback program of up to $5 billion, supplementing the $2.5 billion in repurchases that the insurance giant has already made in 2016. A 14% dividend increase also brought AIG's payout to $0.32 per share, marking a yield of about 2.5%.
The other major news was that AIG expanded its board to include two new members, bringing the total to 16. It nominated hedge fund investor John Paulson to one new seat, and it nominated the other spot to Samuel Merksamer, who works with Carl Icahn's Icahn Capital firm. The agreement avoids a proxy fight and opens the door to further moves to enhance shareholder capital, including a potential breakup of AIG.
Yet the big question is whether further activist efforts at AIG will yield fruit. Currently, the company already expects to keep selling off assets, with an IPO of its mortgage insurance unit and expected sales of operations in Central America and its AIG Advisor Group unit. Like Travelers, AIG has a plan in place to move forward, but it's uncertain whether that will satisfy Icahn and Paulson.
AIG shareholders were pleased with the overall news, sending the stock higher by 6% at midday following the announcement. In the long run, though, AIG has to find ways to grow in order to avoid surprise losses like the one investors saw today.