Pressure Building on AIG CEO Hancock

July 27, 2016 by

The American International Group Inc. chief executive officer has posted three straight quarterly losses and will probably report Tuesday that profit in the three months ended June 30 fell 32 percent, according to analysts surveyed by Bloomberg.

Hancock has presided over a 12 percent stock slump this year through Tuesday, hurting investors including activist billionaires Carl Icahn and John Paulson, even as the CEO shrunk his leadership team, exited unprofitable hedge fund bets and announced a plan to return $25 billion to shareholders over two years. The insurer has struggled with higher-than-expected costs on policies from prior years and near record-low interest rates that pressure investment income.

His job is “enormously at risk,” Meyer Shields, an analyst at Keefe, Bruyette & Woods, said in an interview, adding that Hancock may have until the end of the year to prove his plan is working. “There are a lot of high-profile investors that think AIG could be more profitable than it is,” Shields said. “A fair complaint is that AIG is underperforming its peers.”

Hancock won improved relations with the activists when AIG agreed in February to add Paulson and a representative from Icahn’s firm to the insurer’s board. Icahn dismissed the idea that Hancock’s job is at risk and said his firm has had amicable talks with the CEO.

“Since the settlement, there’s been no thought about replacing Peter Hancock,” Icahn said Monday by phone. “We’ve had friendly discussions, concerning the company, about the acceleration of sales of legacy positions.”

Activists have increasingly preferred to work behind the scenes to improve results, especially when they have board representation, said Steve Balet, head of corporate governance and activist engagement at FTI Consulting.

“If earnings don’t improve, and the management’s current plan is not working, the activists will gain more and more credibility and influence on the board,” Balet said.

One thing that would help Hancock’s standing is to reduce the ratio of claims costs per premium dollar, said Michelle Giordano, an analyst at Neuberger Berman. Jon Diat, a spokesman for New York-based AIG, declined to comment.

When Icahn disclosed an AIG stake in October, and said “the time to act is now,” he made it sound simple to boost the share price: Break AIG into a three companies, one offering property/casualty coverage, another selling life insurance and a third backing mortgages. This would also help AIG exit its status as a systemically important financial institution, a designation that regulators apply to large companies deemed in need of tighter regulation, Icahn said at the time.

MetLife Inc., the largest U.S. life insurer, offers evidence that Icahn’s initial vision isn’t guaranteed to win over Wall Street, at least when the yield on 10-year Treasuries is less than 2 percent. MetLife in January announced a plan to separate a U.S. retail unit, then won a court ruling months later overturning its SIFI tag. The company’s stock is still down 10 percent since Dec. 31.

Hancock has said Federal Reserve oversight isn’t much of a burden and that splitting the company could erode the value of tax assets. He did announce in January a deal to sell a broker-deal network and said he’d separate AIG’s mortgage insurer as part of a divestiture plan to free up as much as $7 billion. That builds on moves he made before Icahn’s involvement, such as selling a stake in aircraft lessor AerCap Holdings NV while parting with businesses in Central America.

“The scorecard is mixed,” Randy Binner, an analyst at FBR & Co., said in an interview. “He’s returning a lot of capital, and that’s very shareholder-friendly. But at the end of the day, AIG needs to be a viable business with presence and brand in a lot of markets.”

That may be a challenge as AIG shrinks. The company has said it would exit 47 countries for its personal insurance business to concentrate on key markets. Hancock is facing increased pressure as Warren Buffett’s Berkshire Hathaway Inc., Chubb Ltd. and XL Group Ltd. gain scale by pursuing takeovers and snatching talent, especially from AIG. That includes staff for businesses that are focus areas for Hancock, such as coverage for high-net-worth individuals and protection against surprises in corporate takeovers.

The entire industry has been stung in recent months by claims from wildfires in Canada, storms in the U.S. and earthquakes in Japan and Ecuador. Other challenges are more unique to AIG. The insurer took a $3.6 billion charge in the fourth quarter when reserves proved inadequate on policies including workers’ compensation and casualty risks that were written in prior years, including the period when Hancock was head of the company’s main underwriting unit.

Hancock announced in December that John Doyle was stepping down as head of commercial insurance and named Rob Schimek to take that role. Schimek has sought to focus on the most profitable lines of coverage and struck a risk-sharing agreement with Swiss Re AG to help improve the underwriting margin, a measure that KBW’s Shields said will be a focal point of the second-quarter results.

“If there isn’t better profitability, they’re not going to return $25 billion,” said Charles Sebaski, an analyst at BMO Capital Markets. “And if they don’t return what they said, there will be calls for new management.”

–With assistance from Beth Jinks.

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