AIG 3Q16 earnings released
- Q3 after-tax operating income of $1.1B or $1.00 per share vs. $691M and $0.52 one year ago. Expectations were for $1.21, and the big miss looks to be from an after-tax charge of $0.37 per share related to updated mortality assumptions for legacy structured settlements.
- Helping to ease the blow, the company announces authorization for an additional $3B in share repurchases, bringing the total to $4.4B. There were $2.3B of buybacks in Q3; through Nov. 2, AIG has bought back $10.8B in stock.
- Book value per share (excl. AOCI) of $85.02 up 2% for the quarter; excluding the DTA as well was up 1% to $62.39. Normalized ROE of 7.1% up from 5.9% a year ago.
- CEO Peter Hancock: Remain committed to 2017 targets, and is ahead of plan on expense management. A six point reduction in adjusted commercial accident year loss ratio is still targeted despite volatile quarterly results. In Q3, the adjusted ratio improved 1.9 points from Q3 one year ago.
However, but just looking at the headline, AIG’s earning has a big miss. How come?
According to AIG’s earning release, all segments but one as “Corporate and Other” have profit increase. Here is what happened with the bad segment,
|
CORPORATE AND OTHER |
|||||||||
| Three Months Ended
September 30, |
|||||||||
| ($ in millions) | 2016 | 2015 | Change | ||||||
| Pre-tax operating income (loss): | |||||||||
| Fair value of PICC investments | $ | 28 | $ | (195) | NM | % | |||
| Income from other assets, net | 363 | 15 | NM | ||||||
| Corporate general operating expenses | (276) | (133) | (108) | ||||||
| Interest expense | (261) | (266) | 2 | ||||||
| Institutional Markets | (526) | 84 | NM | ||||||
| Run-off insurance lines | 22 | (54) | NM | ||||||
| United Guaranty | 130 | 133 | (2) | ||||||
| Consolidation and elimination | (2) | 20 | NM | ||||||
| Pre-tax operating loss | $ | (522) | $ | (396) | (32) | ||||
Corporate and Other reported a pre-tax operating loss of $522 million primarily due to a $622 million loss recognition expense in Institutional Markets based on mortality experience studies that indicated increased longevity, particularly on disabled lives representing a legacy block of structured settlements underwritten pre-2010. This legacy block accounted for over 80% of this loss recognition expense and will be included as part of our Legacy portfolio at year-end. Corporate and Other results also reflected fair value gains on our People’s Insurance Company (Group) of China Limited investment and an increase in Income from other assets, net. In addition, the prior-year quarter included a pension curtailment credit of $175 million in Corporate general operating expenses.
It seems like this is legacy block. So how AIG will handle this block in the future? It is all settled? how about other legacy blocks, will they blow out one day too? When can AIG run out of all dangerous legacy blocks?
Need to check in with tomorrow morning’s conference call.
