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AIG Misses on Q3 Earnings Due to Weather, to Puff Up Reserves

American International Group Inc. AIG reported third-quarter 2017 operating loss of $1.22 per share, which missed the Zacks Consensus Estimate by 47%. In the year-ago quarter, the company had reported earnings of $1.01 per share.

The underperformance stemmed from a $3.0 billion impact from unprecedented catastrophic events like hurricanes Harvey, Irma and Maria. This matched the company’s previously disclosed preliminary loss estimates.

Also perturbing was a disclosure by the company that it added $836 million to prior accident year loss reserves.

The company is getting along well with its expense reduction program (taken up in Jan 2016 to reduce cost base by $1.4 billion by the end of 2017) as evident by a 15.3% decline in general operating and other expenses (GOE) to $2.1 billion.

American International Group, Inc. Price, Consensus and EPS Surprise

Quarterly Segment Highlights

Commercial Insurance Suffers From Loss Claims

Net premiums written were down 13% year over year (both on a reported and a constant dollar basis) to $3.8 billion due to strategic portfolio actions and divestitures.

Combined ratio of 195.4% deteriorated a massive 8960 basis points year over year, primarily due to an increase in loss ratio, which was due to huge catastrophe losses. This also caused pre-tax operating loss of $2.86 billion in contrast with an operating income of $685 million in the year-ago quarter.

Uninspiring Consumer Insurance Results

Premium and fees of $3.88 billion remained unchanged year over year.

Pre-tax operating earnings decreased 18% year over year to $1 billion due to a decline in contribution from Individual Retirement and loss from Personal Insurance sub-segments.

The segment’s combined ratio of 105.6% deteriorated 810 points year over year.

Financial Position

At the end of the third quarter, the insurer’s adjusted book value per share (excluding AOCI) was $57.44, down 6.5% year over year.

Core adjusted return on equity (ROE) was negative 11.6% compared with 9% in the year-ago quarter.

In the third quarter, AIG spent $275 million on share repurchase.

Business Update

In September, the decision by Financial Stability Oversight Council stripped off the nonbank Systemically Important Financial Institution designation on AIG.

On Nov 1, 2017, AIG closed the sale of its remaining life settlements’ portfolio, which will result in the remittance of $1.1 billion of cash proceeds to AIG Parent in fourth-quarter 2017 and fulfill the $9 billion return of Legacy capital.

Turn Around Might Take Some More Time

AIG’s results reflect the wrath of Mother Nature. The company has been suffering from tough markets conditions and its massive size, with numerous uncorrelated businesses creating little or no synergy. A number of asset sale and business divestitures made over the last many years have however streamlined the company to some extent.

Last quarter, the insurance giant appointed Brian Duperreault as it new CEO, with expectations of improving operations, by completing restructuring initiatives already underway and making further changes.

Nevertheless its underperforming commercial lines business, and exposure to catastrophe continue to bother. We believe it will take a while for the efforts to show actual results.

Zacks Rank and Other Players

AIG carries a Zacks Rank #4 (Hold).  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among the other players in the same space, the bottom line at MetLife Inc. MET, Prudential Financial Inc. PRU and Aflac Inc. AFL beat third-quarter estimates by 21.1%, 11.1% and 4.9%, respectively.

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