American International Group (AIG, Financial) posted a dismal third-quarter earnings report Monday night, revealing a considerable net loss, and plans to cut up to 400 senior-level jobs.
CEO Peter Hancock said he blamed “market volatility” for AIG’s tough quarter, which saw the company lose $231 million, or 18 cents per share. Stacked against AIG’s Q3 2014 profit of $2.19 billion, or $1.52, Monday’s report will no doubt lend credibility to investor Carl Icahn (Trades, Portfolio)’s previous calls to break up AIG once and for all.
Unfortunately for Hancock, very few units had good news to report. Although AIG did beat many revenue estimates, the company’s P&C unit posted a combined ratio of 102.7, up from 102.1 – with bosses claiming that costs on commercial auto insurance and property insurance had hurt margins substantially. Meanwhile, premium revenue was said to have been hit by decision to scale back in casualty lines. It fell to 6.6%, or $5.01 billion.
Operating income was nearly halved at AIG’s consumer business, run by CEO Kevin Hogan. The decline was driven primarily by dwindling contributions from AIG’s retirement operations, which fell by 42%. Worse yet, AIG’s life segment posted a $40 million loss.
Things weren’t looking much better in the company’s alternate holdings, either. As a whole, the units reported a $23 million loss – compared to Q3 2014 gains of $486 million. Hedge funds lost $324 million, while net unrealized gains on bonds shrunk from $12.1 billion in Q2 to around $11 billion in Q3. The company’s institutional markets business didn’t fare any better, with profits down 45%.
That being said, there were a few rays of sunshine in Monday night’s results. Private equity returns increased by 7.5%, to $229 million, while profits at AIG’s mortgage insurance unit rose by one-fifth, to $162 million.
It’s probably not a coincidence that last night’s report coincided with news that Hancock is planning to cut around 20% of all senior-level jobs at AIG, equating to approximately 400 employees. Restructuring initiatives are already in the works, guided by IT improvements that should save the company up to $500 million.
“This quarter's results, while falling short of expectations due to market volatility, show signs that we are making progress to transform AIG for long-term competitiveness,” Hancock said in a statement. “Our strategy focuses on four major objectives: to narrow our focus on business where we can grow profitably, drive for efficiency, grow through innovation and optimizing our data assets, and return excess capital.”
Hancock will no doubt be inundated this week with serious questions from investors concerning that strategy – driven by Carl Icahn (Trades, Portfolio)’s claims that AIG has become ‘too big to succeed’ and should ultimately be dismantled. Sources claim the billionaire investor has got around a 2% stake in AIG.
On Wednesday, Icahn published an open letter to Hancock in which he argued the $82 billion insurer’s status as a Systemically Important Financial Institution (SIFI) had created an “increasingly onerous regulatory burden” on what could be a very successful company. As a result, Icahn proposed the giant split its property and casualty, mortgage and life insurance businesses into three separate companies.
Peter Hancock offered a measured response to Icahn’s proposal, arguing that AIG had already gone to considerable lengths in order to simplify its business, and would be prepared to go further.
Despite a tough quarter, most analysts are currently predicting that AIG is still on track to outperform the market for the full year. Shares fell by up to 3.66% to a low of $61.80 after hours Monday night.
