$5.6B Charge Dims AIG Turnaround Hopes

The charge to cover possible future claims was larger than analysts expected and led to a net loss of $3.04 billion in the fourth quarter.
Matthew HellerFebruary 16, 2017
$5.6B Charge Dims AIG Turnaround Hopes

AIG posted a larger-than-expected quarterly loss as the insurance giant booked a $5.6 billion reserve charge to cover possible future claims, casting doubt on its turnaround efforts.

For the fourth quarter, AIG had a net loss of $3.04 billion, or $2.96 per share, compared to a loss of $1.84 billion, or $1.50 per share, a year earlier.

In an earnings call Wednesday, chief executive Peter Hancock said the reserve charge reflected “emerging severity trends across lines and accident years.”

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“The trends we witnessed and reacted to this quarter were broad, and we believe are materially impacting the overall U.S. casualty market, which we see generally as rate inadequate,” Mr. Hancock said. “We chose to make more prudent reserve assumptions.”

AIG last month agreed to pay Berkshire Hathaway about $10.2 billion to assume 80% of its reserve risk on most of its U.S. commercial insurance exposure before 2016 associated with those policies. At the time, it did not disclose the amount of the reserve charge it would have take.

“Analysts expected a far smaller charge,” The Wall Street Journal reported, citing a research note in which Credit Suisse said it had expected a reserve deficiency of just $2 billion.

Randy Binner, an insurance analyst at FBR Capital Markets & Co., noted that the $5.6 billion charge included $1.3 billion for 2015, and $1.2 billion for 2013 and 2014. “My observation is that if everything they took a charge for happened in the distant past, it would be much easier to embrace the turnaround story,” he told the WSJ.

“Their recent year activity has been deficient,” Binner added.

AIG has been under pressure from activist investors Carl Icahn and John Paulson. “The more detailed breakdown of the charge may dim hopes of a rebound at the insurer,” according to the Journal.

In trading Thursday, the company’s shares rose 2.3% to $62.27. It also announced this week that it was adding $3.5 billion to its share buyback program.