AIG American International Group Inc

By Leslie Scism 

American International Group Inc.'s turnaround plan took a hit following a disappointing fourth-quarter earnings report that sent its shares tumbling 9%.

The insurance giant told analysts that it will now be more difficult to meet two important year-end targets for improving profitability in the company's core unit of selling property-casualty policies to businesses. It also surprised Wall Street with a $5.6 billion addition to reserves that was larger than anticipated.

"There is a question, to what degree has this turnaround stalled? To what degree is the progress sliding backward?" said Cathy Seifert, an equity analyst with CFRA Research. "It speaks to credibility. There was an agenda set out a year ago, and they haven't hit all the targets."

AIG's 9% drop Wednesday to $60.85 was the biggest percentage decline for the stock since August 2011. It was also the worst performer in the S&P 500 on the day.

AIG nearly collapsed during the 2008 global financial crisis and needed a $185 billion bailout to keep going. Now, Chief Executive Peter Hancock is trying to sell businesses, reduce expenses and make big changes in the insurance products it sells in a bid to boost profitability. It is trying to satisfy activist shareholders Carl Icahn and John Paulson, who have publicly called for AIG to break into smaller pieces.

AIG added Mr. Paulson and a representative of Mr. Icahn to its board last spring. Mr. Paulson's hedge-fund firm, Paulson & Co, disclosed Tuesday that its holdings of AIG dropped to 4.8 million shares as of Dec. 31, compared with roughly 9 million on Sept. 30.

A key part of Mr. Hancock's turnaround plan is a set of profitability targets announced in January 2016 designed to bring AIG's results in line with the best of its rivals. Among those goals was an underlying 10% return on equity on its core business by the end of this year.

But on Wednesday it reduced that target to 9.5%. Return on equity reflects profits earned against capital invested in the business.

AIG also said it would take until 2018 to meet another closely watched goal: a reduction in the "loss ratio" on business-insurance policies to levels achieved by its most-profitable peers. A loss ratio is the amount of each premium dollar paid on claims and related expenses.

AIG's goal was about 60 cents per dollar at year-end, but it said it now is targeting 62 cents. That contrasts with the 65 cents that AIG was paying two years ago.

Mr. Hancock reiterated a pledge started last year to return $25 billion to shareholders by the end of 2017 through buybacks and dividends. AIG was more than halfway to that goal through Tuesday. But the company emphasized in the earnings and a subsequent conference call that reaching $25 billion is still subject to regulatory approvals, discussions with ratings firms and "future profit improvements."

Analysts spent part of the Wednesday call pressing AIG executives for details about its $5.6 billion reserve boost, which was far higher than expected. It follows a $3.6 billion addition in the year-ago quarter.

Mr. Hancock and other executives cited "emerging trends" and new claims data. They specifically cited worsening trends in vehicle wrecks that affect policyholders' fleets of commercial vehicles, more-expensive medical-malpractice claims and financial-crisis-related liability claims that are costing more than expected.

AIG said that much of the latest reserve addition would be covered under a reinsurance agreement with Warren Buffett's Berkshire Hathaway Inc. that was announced last month. The agreement would reduce AIG's exposure to such charges going forward, Mr. Hancock said.

Write to Leslie Scism at leslie.scism@wsj.com

(END) Dow Jones Newswires

February 15, 2017 18:33 ET (23:33 GMT)

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