American International Group Will Reorganize to Realize Savings

AIG's Restructuring, Business Exits Could Boost Long-Term Returns

Dismal third quarter

American International Group (AIG) reported its 3Q15 earnings results on November 2, 2015. With operating earnings per share (or EPS) of $0.52, the company missed Wall Street analysts’ EPS estimates of $1.03.

AIG’s earnings fell by 60% due to $274 million in pre-tax restructuring costs when compared with the prior year’s quarter. On October 28, 2015, billionaire investor Carl Icahn wrote a letter to AIG’s chief executive officer (or CEO) Peter Hancock, suggesting that AIG split into three companies: one providing property-casualty coverage, another offering life insurance, and another backing mortgages.

AIG has planned reorganization through 2017 that will cost it $500 million. Through this restructuring, the company hopes to save $400–$500 million every year. The company also plans to cut 300–400 senior management jobs, forming 20% of 2,000 senior positions, as part of the restructuring.

AIG posted 3Q15 after-tax operating income of $0.69 billion. The company reported a net loss of $231 million for 3Q15 compared to $2.2 billion for 3Q14. Its performance deteriorated following a lower income in hedge fund holdings in the People’s Insurance Company of China, one of China’s biggest insurers.

Insurance giant

AIG is one of the largest insurers in the United States. AIG’s annual revenue is around $65 billion, and the company operates across the globe in multiple product lines.

The Americas remain the major contributor toward AIG’s top line, providing ~50% of property and casualty premiums and 97% of life insurance revenues. In the United States, AIG’s competitors include ACE (ACE), Allstate (ALL), and Chubb (CB). Together these companies form 0.88% of the Vanguard Dividend Appreciation ETF (VIG).

AIG’s new leadership team, led by Hancock, took charge in September 2014 to integrate and position the company for improved and sustainable performance. Hancock has a strong track record in the financial services industry, and he served as CEO of AIG’s property and casualty division before his current role as the company CEO.

Here are the two major questions we’ll be investigating in this series:

• How will AIG improve its operating performance?

• What are the businesses companies can exit in order to improve shareholder value?

Continue to Next Part

Browse this series on Market Realist:

• Part 2 - American International’s Consumer Insurance Earnings Fell in 3Q15

• Part 3 - AIG’s Commercial Insurance Was Impacted by China’s Business

• Part 4 - AIG’s Balance Sheet Stayed Strong with Moderate Leverage in 3Q15