AIG Posts Loss on Large Charge to Boost Reserves

By Leslie Scism 

American International Group Inc. posted a $5.6 billion pretax charge to boost its claims reserves, larger than expected and leading to one the company's worst quarterly results since the financial crisis.

Even as AIG posted a $3.04 billion net loss, or $2.96 a share, its board announced a $3.5 billion additional share-buyback program, testimony to strong results in many other parts of the company. Operating profits for its consumer-insurance businesses jumped 56%, to $969 million.

The additional share repurchasing keeps AIG on track to return at least $25 billion in capital to its shareholders in 2016 and 2017.

AIG set up the aggressive capital-return program as a centerpiece of an effort to improve results amid pressure from billionaire investors Carl Icahn and John Paulson to break up. Mr. Paulson and a lieutenant for Mr. Icahn now sit on AIG's board.

AIG alerted investors to a material fourth-quarter charge in announcing a reinsurance agreement last month, with Warren Buffett's Berkshire Hathaway Inc., without disclosing the dollar amount. Under the pact, one of the largest ever of its kind, AIG is paying Berkshire roughly $10 billion.

At $5.6 billion, it was far larger than estimated by Wall Street analysts. It comes after a $3.6 billion before-tax reserve boost in the year-earlier quarter that some thought had brought the reserves to an ample, conservative level.

The large size of this new charge may shake the confidence of some investors and sets the stage for analysts to grill the company in its Wednesday earnings call.

Peter Hancock, AIG's chief executive officer, said in the earnings release that the company had "responded definitively to emerging severity trends that we believe are materially impacting the overall U.S. casualty market."

He said the Berkshire reinsurance deal, meanwhile, "significantly reduces the risk of further reserve additions in some of the most volatile lines." Reinsurers take on responsibility for some claims' costs of policies sold by primary insurers.

The company said the charge pertains to a wide array of insurance policies sold to business clients as far back as decades and as recently as 2016.

The Berkshire pact covers such product lines as workers' compensation, directors' and officers' liability, professional indemnity, medical malpractice, commercial automobile and some other liability policies.

In other parts of its profit-improvement effort, AIG said its expense reductions were running ahead of schedule. Net premiums written in its commercial-insurance business decreased by 20% as a result of another reinsurance pact, with Swiss Re, and deliberate shrinkage to get out of certain poorly performing casualty lines.

The largest profit-generating part of AIG's consumer operations was its retirement-income annuity business, with $542 million in profit.

AIG said it returned $13.1 billion to shareholders in 2016, and has bought back $1.2 billion of stock so far this year.

In the year-earlier quarter, AIG posted a net loss of $1.84 billion, or $1.50 a share.

Write to Leslie Scism at [e-mail]

(END) Dow Jones Newswires

February 14, 2017 16:48 ET (21:48 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.