It’s been 2 years since I posted on AIG and it has been an eventful 2 years. A new management team (again) has been installed, led by industry veteran Brian Duperreault, to try to turn this stubborn ship around. The results, as below, show the scale of the task. Reduced investment returns, reducing legacy and asset balances, and poor reinsurance protections are just a few of the reasons behind the results, in addition to the obvious poor underwriting results.
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Oversize risks from the previous Go Large strategy have been disastrous for both the catastrophic losses and reserve strengthening on the commercial P&C business, as the results below show. Duperreault and his team have been busy working on refocusing the underwriting philosophy, modernizing systems and analytics, bringing in talent (including buying Validus), redesigning reinsurance protections and reshaping the portfolio.
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In their latest quarterly call, the new management team is boldly predicting an underwriting profit on the general insurance business (commercial and consumer) in 2019, assuming a catastrophe load of less than 5% and reductions in loss and expense ratios, which will require a +10% improvement in the 2018 result. In a sector where competitors have long since evolved (some use AI to optimise their portfolios and returns) and the alchemy of low return capital providers is ever present, they have set themselves an aggressive target.
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Given the current share price just below $42, its trading around 76% of the adjusted book value. If all things go well, and some recent headwinds (e.g. reserve strengthening) are tamed, I can see how a pre-tax income target of $3.5 billion to $4 billion and an adjusted income diluted EPS of $4.00 to $4.50 is achievable. These targets are roughly where analysts are for 2019, returning to EPS results achieved over 5 years ago. I concur on the targets but think the time-frame may be optimistic, another year of clean-up looks more likely.
It will be interesting to see how the year progresses.
This blog represents my personal views and is not reflective of the views or opinions held by any company or employer I work for currently or have worked for in the past. The views expressed herein are based solely upon publicly available data. No views expressed herein should be taken as an endorsement to take any particular course of action in the markets. The basis of this blog is that different views should be expressed and readers make up their own minds on the what they believe and act accordingly.
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