5 Things To Note In American International Group Inc (NYSE:AIG) Earnings

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American International Group Inc (NYSE:AIG) reported earnings today. Investors had already been expecting a loss along with disappointing results when AIG noted that it would have to increase reserves as part of a presentation on strategic imperatives.  The company reported a net loss of $1.50 per diluted share or $1.8 billion in the 4th quarter of 2015 compared to net income of $655 million in the same period of 2014. Full year net income slumped to $2.2 billion or $1.65 per diluted share, compared to $7.5 billion or $5.20 last year. At the end of 2015, book value per common share was $75.10, or $58.94 excluding accumulated other comprehensive income and DTAs. Here are some things to note.

  • 1. $3.6 billion pre-tax reserve

The company announced a $3.6 billion pre-tax reserve for their Non-Life Insurance Companies. $1.3 billion was related to accident years 2004 and prior, while $2.3 billion was for the period between 2005 and 2014. U.S & Canada casualty was the predominate source of the charges at $2.2 billion. Financial lines and run-off lines consisted of $566 million, and $541 million respectively of the charges.

  • 2. Two New Directors nominated by Carl Icahn and John Paulson for the Board of Director

AIG increased the size of its board of directors from 14 to 16 and nominated John Paulson of Paulson & Co, along with Samuel Merksamer, a Managing Director of Icahn Capital LP. Icahn announced that he reached agreement with AIG. He personally declined to join the board in order to not spread himself thin. Icahn commended the board for adopting a number of his recommendations over the last few months and continues to believe smaller and simpler will benefit AIG. In a statement Icahn said they “look forward to working collaboratively with the board and management to help catalyze a turnaround in core P&C operations, a more transparent operating structure, and the ultimate shedding of the SIFI designation.”

  • 3. Capital Return of $25 billion over next 2 two years
    • Increased Buy-back Authorization to $5.8 billion
    • Bought back $10.7 billion in shares in 2015
    • Raised Dividend 14 percent to $0.28 Per share

AIG announced that it had authorized the repurchase of additional shares up to $5.8 billion. In 2016, the company made additional repurchases of approximately $2.5 billion pursuant to February 11th.  On December 15th, 2015 the company had repurchased $9.7 billion for 2015, indicating that they purchased an additional $1 billion through the end of 2015.  The company had an aggregate repurchase balance of $4.3 billion on that date, which means that since December 15th they have repurchased $3.8 billion in shares. Additionally, AIG raised its dividend to $0.32 share from $0.28 per share. All of these initiatives are part of an effort to return $25 billion in capital over the next 2 years.

  • 4. Work on Strategic Imperatives Continues

The announced IPO of up to 19.9 percent of United Guaranty Corporation will be the first step towards a full separation of that unit. The company announced the sale of the AIG Advisor Group in January 2016, which is expected to close in the 2nd quarter of 2016. AIG additionally monetized $2.1 billion of legacy assets through the sale of $184 million in ordinary H shares of their PICC property & Casualty Limited during the 4th quarter of 2015. The company also announced plans to sell operations in four Central American countries during the 4th quarter of 2015.

  • 5. Progress needs to be made in Core Operations particularly in Property and Casualty

The company  had a consolidated normalized Return on Equity excluding AOCI and DTA of 6.7 percent in the 4th quarter, and 6.8 percent for the full year. These numbers significantly lag its peers.  This is something investors in the company want to see significant progress on.  The combined ratio of Property and Casualty spiked to 161.5 based upon the reserve charges, mentioned above. AIG needs to improve underwriting and cost reductions particularly in Property and Casualty so it can move towards earning a double digit return on equity, in order for its stock to rise.

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