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AIG Slumps on Broken Hearts, Lower Forecast, Paulson Retreat

Updated on
  • Insurer lowers 2017 target three months after setting goal
  • Paulson lowers stake in AIG while sitting on insurer’s board

American International Group Inc. posted the biggest plunge in the S&P 500 Index after the insurer missed analysts’ estimates with a loss and lowered its 2017 forecast.

AIG is still “breaking hearts,” Mark Dwelle, an analyst at RBC Capital Markets, said Wednesday in a note. “Overall results are worse than expected,” and not just because of costs to fill a reserve shortfall.

The fourth-quarter net loss widened to $3.04 billion on higher-than-expected claims costs, AIG said late Tuesday. The New York-based company suffered another setback when the hedge fund led by John Paulson, an activist investor who sits on AIG’s board, reported in a regulatory filing that it cut its stake. Then Wednesday, the insurer lowered its 2017 target for return on equity.

AIG plunged $6.04, or 9 percent, to $60.85 at 4 p.m., the biggest one-day fall since 2011.

“We understand some of the frustrations people have,” Chief Financial Officer Sid Sankaran said in a conference call Wednesday. “We have not been happy with our historical reserve risk outcomes either.”

The new target for normalized ROE is 9.5 percent at the so-called core segment, which excludes operations that Chief Executive Officer Peter Hancock is seeking to wind down, the company said in a slide show presentation. That compares with a goal of 10 percent announced just three months ago.

In 2016, the core ROE figure was 7.8 percent, missing the goal of 9.3 percent to 9.7 percent. AIG has been unprofitable four of the past six quarters.

Credibility Questioned

The recent performance “calls into question the credibility of the turnaround plan” at property-casualty insurance operations, Tom Gallagher, an analyst at Evercore Partners Inc., said in a note to clients. “The company has had significant management turnover over the last few years, and we wouldn’t be surprised if that trend continues following these results.”

The holding by Paulson & Co. dropped to 4.8 million shares as of Dec. 31 from about 9 million on Sept. 30 and more than 11 million on March 31, according to data compiled by Bloomberg. The hedge fund firm declined to comment.

Hancock said that investment income will be lower than previously planned because of a deal in which Warren Buffett’s Berkshire Hathaway Inc. agreed to take on liabilities and assets from AIG. That reinsurance transaction will limit AIG’s risk if claims costs continue to worsen, and could also help free up an additional $2 billion in capital “over time,” Sankaran said.

AIG has also been shifting its business mix, relying less on casualty coverage while expanding in segments such as cyber risk. And Hancock has been retreating from investments such as hedge funds to reduce volatility.

Share Buybacks

While the CEO reiterated his plan from early 2016 to return $25 billion to shareholders over two years, the company said Tuesday that the commitment is “subject to regulatory and rating agency considerations and future profitability improvements.” S&P Global Ratings downgraded the company on Jan. 31.

And A.M. Best, whose grades are closely monitored by customers of commercial insurance, last month placed the company’s rating on review. If the ratings firm affirms its A rating on AIG, that could help the insurer’s shares, Jay Gelb, an analyst at Barclays Plc, said in a note to investors.

However, a downgrade to A- “could result in slowing or ceasing share buybacks to conserve capital,” he wrote. “In a more pessimistic scenario, we suspect AIG could require a dilutive capital raise or exit of business units.”

— With assistance by Lisa Du

(Updates with closing share price in fourth paragraph.)
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