Parting ways isn’t always pretty, but sometimes it’s also the right thing to do.
American International Group put up an ugly $7.9 billion net loss in the second quarter. That stems largely from a $6.7 billion accounting loss related to the finalized sale of the vast majority of Fortitude, a specialized reinsurance company, to private-equity firm Carlyle Group CG -2.03% and other investors. The sale brought in $2.2 billion of cash and improved AIG’s AIG -7.83% liquidity position—not a bad thing during a pandemic and economic crisis.
But it did have some knock-on accounting effects. Those included the write-down of some prepaid insurance assets and a loss on the sale of assets that were tied to Fortitude’s business. Fortunately for AIG investors, though, these losses won’t have an impact on its regulatory capital levels, meaning there isn’t a potentially dilutive capital raise ahead.
The broader point is that AIG continues to make progress in reducing earnings volatility by shedding some “long tail-risk” businesses, those with hard-to-quantify, potentially large losses over the long term, and refocusing on its core operations of life and property and casualty insurance. So investors ought to look past the one-time accounting adjustments.
Many general insurers have moved away from businesses like Fortitude, which provides reinsurance to legacy insurance and retirement portfolios, including AIG’s. Similar businesses have likewise paired up with private-equity investors, like KKR KKR 1.20% with Global Atlantic or Blackstone BX -1.64% with FGL, which have the plentiful capital to absorb tail risk and potentially earn bigger spreads with their investment units.
AIG is still a beneficiary of some of the industry’s positive trends, notably sharply rising rates in commercial insurance.
Photo: John Marshall Mantel/Zuma PressAIG also in the second quarter began giving up some of its premium income as it starts a risk-sharing arrangement via a Lloyd’s syndicate for its individual insurance unit for private, high-net-worth clients. Over time, this should help AIG actually grow the book by reducing its catastrophe exposure, and also to collect more fee-like revenue from things like administering claims.
The effects of Covid-19 didn’t help the quarter, but didn’t totally derail it either. In its core businesses, AIG reported a positive adjusted after-tax income of $571 million, the measure the street focuses on. That translates into 66 cents a share, topping an analyst consensus of 50 cents. Covid-19-related losses were a manageable pretax $458 million, though elevated death claims also did contribute to a year-over-year 16% drop in adjusted pretax life and retirement insurance income.
So AIG continues to be noisy. But it also is still a beneficiary of some of the industry’s positive trends, notably sharply rising rates in commercial insurance. And it now has the capital buffer to offer bigger policies to key clients when others might be pulling back. AIG also noted a rebound in the retail life and retirement sales pipeline in July, which if sustained would help cushion the effect of Covid-19 on mortality rates. The work-from-home trend may also help AIG in its big cost rationalization push.
There isn’t much to love about the insurance business right now, with continued coronavirus risks and rock-bottom interest rates. But after a 7% share-price drop on Tuesday morning, AIG at least has more potential upside than others as it continues its evolution.
Write to Telis Demos at telis.demos@wsj.com
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August 04, 2020 at 11:32PM
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AIG Results Look Grim but Represent Progress - The Wall Street Journal
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