American International Group Inc. posted profit that fell short of Wall Street estimates as costs swelled on contracts in which the insurer guarantees payments to accident victims.
Third-quarter net income of $462 million, or 42 cents a share, compares with a net loss of $231 million, or 18 cents, a year earlier, the New York-based company said Wednesday in a statement after U.S. trading closed. Operating income, which excludes some investing results, was $1 a share, missing the $1.20 estimate of 19 analysts surveyed by Bloomberg.
Chief Executive Officer Peter Hancock is seeking to rebound after posting three straight quarterly losses through this year’s first period. He’s been selling assets and cutting jobs to simplify AIG as part of a plan to return $25 billion to shareholders over two years and placate activist investors Carl Icahn and John Paulson, who won representation to AIG’s board this year.
The goal is to make AIG a “leaner and more focused insurer,” Hancock said in the statement, as he announced a $3 billion increase in the insurer’s stock buyback authorization. “Our portfolio management decisions, actions to run off the legacy portfolio and capital allocation all exemplify our guiding principle of building economic value.”
In January he created a legacy block of assets that AIG is seeking to wind down or exit. Those include so-called structured settlements like the ones that burned the company in the third quarter with a pretax expense of $622 million. On those contracts, people who win legal settlements or court orders in disputes tied to workplace accidents or medical malpractice turn to AIG for guaranteed payments, rather than lump-sum awards. Costs rise for the insurer when interest rates are lower or the people live longer than expected.
AIG slipped 3.2 percent to $58.60 in extended trading at 4:58 p.m. in New York. The company dropped about 2 percent this year through Wednesday’s close.
Capital Losses
Third-quarter results also included more than $500 million in capital losses, largely tied to currency fluctuations such as the decline in the pound after U.K. voters chose to leave the European Union.
Book value rose to $85.02 a share at the end of September, from $83.08 three months earlier. Operating return on equity, climbed to 6.7 percent during the period from 3.5 percent in last year’s third quarter.
On a normalized basis, which excludes some catastrophe losses and other one-time events, the ROE was 7.1 percent. Before his firm got a seat on AIG’s board, Icahn mocked Hancock for being unable to reach 10 percent.
AIG spent about $2.3 billion in buybacks during the period and another $946 million since then, according to the statement.
For the commercial insurance unit led by Rob Schimek, pretax operating income rose 23 percent to $729 million as investment results improved. The combined ratio worsened to 105.3 from 102.3, meaning the insurer spent about 105 cents on claims and expenses for every premium dollar earned. Catastrophe costs almost tripled to $253 million. Rivals including Travelers Cos. were stung by flooding in the U.S. in the period.
Premium revenue at AIG’s commercial segment slipped 11 percent to $4.5 billion. Schimek this year struck a risk-sharing deal in order to improve margins, which reduces sales.
Mortgage Insurance
AIG announced a deal in August to sell its mortgage guarantor to Arch Capital Group Ltd. for $3.4 billion while agreeing to reinsure some of the policies. The coverage guards lenders against borrower defaults. Profit at that unit, led by Donna DeMaio, slipped about 2 percent to $130 million. AIG has said it expects the transaction to be completed next year.
Hancock also reached a deal last month to sell commercial and consumer units in nations including Argentina and Turkey to Prem Watsa’s Fairfax Financial Holdings Ltd. The Toronto-based company will also acquire renewal rights on a portfolio of business written by AIG’s Central and Eastern European operations.
The institutional markets segment posted a loss of $526 million, compared with profit of $84 million, on costs tied to the structured settlements.
At the consumer business run by Kevin Hogan, results improved at the retirement operation, where profit jumped 74 percent to $1.11 billion, helped by improved performance from hedge fund holdings. The life segment posted profit of $98 million, compared with a loss of $40 million loss in last year’s third quarter. Personal insurance’s contribution more than doubled to $178 million on improved underwriting as expenses fell amid a decrease in direct-marketing and lower costs for employee compensation.
Hedge Funds
Net investment income, which includes results from various units on a bond-dominated portfolio, rose 18 percent to $3.78 billion, according to a supplemental filing on AIG’s website.
Hedge funds contributed $214 million, compared with a loss of $324 million a year earlier. AIG has been reducing those holdings to limit volatility and move into assets that face less-strict capital charges. Profit from private equity fell by more than half to $113 million.
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