There Could Be Management Changes Or Divestitures At AIG After P&C Improvement Plan Miss

Evercore ISI expects American International Group Inc AIG to miss its current accident year loss ratio guidance for 2017 and suggests the insurer may consider management changes or divestitures.

The comments came after a $5.6 billion reserve charge led AIG to report a bigger loss of $3.04 billion for its fourth quarter.

Analyst Commentary

Analyst Thomas Gallagher says AIG’s guidance for current accident year loss ratio improvement of 62 percent by the end of 2017 “seems aggressive” given the apples to apples exit rate of around 67 percent at year-end 2016.

AIG believes earn in of premium increases versus loss costs should provide around 2 pts of year/year benefit, while most of the remainder will come from risk selection.

“While another very large PYD charge could set the stage for both easier current accident year improvement as well as less bad PYD going forward, we see no reason to assume that AIG will now achieve better year over year improvement in 2017 vs. 2016 than they were previously expecting,” Gallagher wrote in a note.

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Gallagher says AIG may consider management changes as well as larger divestitures, given the miss on the P&C improvement plan.

Divestitures

In terms of divestitures, the analyst noted that AIG could consider selling VALIC, which may have attractive private market value versus current earnings power. The Variable Annuity Life Insurance Company, or VALIC, offers tax-qualified retirement plans, supplemental tax-deferred and after-tax investments.

“VALIC is not one of the businesses in the Legacy Portfolio segment, and those businesses allocated to that segment (which has $10.6 billion of attributed equity, $38 billion of life insurance reserves, and $7B of P&C run off reserves) are the more obvious candidates to be sold or reinsured,” Gallagher highlighted.

Meanwhile, bulls argue that AIG “kitchen-sinked” the reserve charge, and could have a clear path ahead for steady improvement in commercial underwriting results. But, the analyst said this was not an overly conservative assessment of reserves.

“The point being that the poor recent accident year development has cast doubt on management’s ability to deliver on a P&C turn around, and we don’t believe that management was incentivized to deliver a self- inflicted wound,” Gallagher added.

However, Gallagher maintained his Buy rating, with a price target of $69.

At last check, shares of AIG were up 1.50 percent to $61.76.