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American International Grump

3 November 2015 By Antony Currie

Dismal earnings at American International Group are adding fuel to Carl Icahn’s ire. The activist investor wants the insurer to break up and cut more costs. Chief Executive Peter Hancock has promised to do the latter. But the $231 million loss the company reported for the three months to September reveals just how much work it will take to get shareholders on board.

Various factors worked against AIG over the summer. Investment income and gains fell, in part because of disappointing returns at hedge funds. Marking assets down to their market value also put a dent in results. And the company was forced to take a $274 million pre-tax charge to cover some of its latest cost cuts.

The trouble is that rival Travelers avoided similar problems. It reported an annualized return on equity for the latest quarter of 15.4 percent. Analysts expect MetLife, which reports later this week, to earn a 7.8 percent return on equity – hardly stellar, but obviously better than a loss.

AIG hasn’t been able to earn that much even in decent quarters: Annualized equity returns have been stuck between 5.1 percent and 7.7 percent for more than a year. It’s not for lack of trying. Since receiving a $182 billion taxpayer bailout in 2008, AIG has sold more than 30 businesses and hived off around $90 billion of assets. It has also returned $13 billion to shareholders since 2013, more than doubling its dividend a couple of months ago. And it is in the process of reducing expenses by up to 5 percent over the next two years.

Icahn’s grumbling has prompted Hancock to find another $500 million or so to cut. Along with already contemplated pruning, that will help boost ROE, but perhaps only by less than 1 percentage point. AIG would still trail competitors.

The company is also touting plans to return more capital to shareholders, invest in technology and innovation and focus on areas for profitable growth. That, however, should be standard operating procedure.

Hancock, who has only been in charge for a year, may have a point that breaking AIG into three companies does not make “financial sense.” It would increase costs, reduce the diversification that rating agencies like and potentially mean less capital would be available to return to shareholders. At the moment, though, he’s hardly arguing from a position of strength.

 

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