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AIG management’s ability to execute turnaround questioned by S&P

7th June 2017 - Author: Steve Evans

The ability of the management of troubled insurance giant American International Group (AIG) to execute on its recovery plans has been questioned by rating agency Standard & Poor’s, despite the arrival of Brian Duperreault as CEO.

AIG buildingAIG has been working to turn-around its performance in recent years, an ongoing process which eventually saw the turnover of its leadership and the entry of reinsurance industry veteran Brian Duperreault to take the helm.

But despite this change, S&P analysts believe that AIG will fail to achieve the rapid turnaround that many shareholders want from it, saying that “slower-than-expected progress in improving operating fundamentals” will weigh on the insurers ratings for up to two years.

As a result S&P has revised its rating outlook on AIG to negative from stable.

“The outlook revision reflects AIG’s protracted period of delivering P&C Commercial Insurance underwriting initiatives, which we believe may be a predictor of its executional effectiveness on a prospective basis,” explained S&P Global Ratings credit analyst Tracy Dolin.

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AIG has delivered in the last quarter, with many equity analysts much more comfortable with the performance it had achieved, shareholders feeling happier (especially due to the entry of Duperreault) and the adverse development coverage it secured from Berkshire Hathaway.

But S&P believes that delivery is too slow and set to continue at a slow pace, with improvements in the commercial property & casualty insurance book, which have in the past been “subpar and subject to revisions”, likely to remain weak.

S&P does note that additional diversification has helped AIG’s operating performance, as it has sought to shift itself from being quite so focused on a narrow range of lines.

But the rating agency is scathing of the ability of AIG’s management to achieve its targets, even with Duperreault in charge, saying; “We question management’s ability to effectively execute its plan to achieve adjusted accident year loss ratio performance of 62% for its troubled Commercial Insurance segment by year-end 2017, raised from its original 60% target, given high its modest track record to date.”

S&P does say that it sees Duperreault as “An accomplished P/C insurance industry veteran” with a track record that “speaks for itself.”

But the rating agency does not believe that there will be any magical turnaround; “His succession comes at a precarious time. Brian Duperreault became the company’s sixth CEO in nine years and there have also been a number of other senior management changes within the past couple of years. While Brian Duperreault’s recent appointment addresses CEO succession uncertainty, in our view it may take a while to turn the Commercial operations around and meaningfully improve operating performance and AIG’s earnings quality.”

Despite the shift to a negative outlook, S&P has affirmed AIG’s ratings based on its “very strong business risk profile and strong financial risk profile.”

The reinsurance agreement with Berkshire Hathaway’s NICO is viewed positively and S&P said that it sees this as a “Significant step in the right direction to reduce reserve volatility and we provide some capital relief in our capital-assessment model.”

So the negativity is really related to S&P’s belief that the turnaround is going to take longer than anticipated, be difficult to achieve, and the rating agency said that it could lower AIG’s ratings by a notch if there isn’t a significant improvement in AIG’s operating results, as compared to other global multi-line players.

Fellow rating agency A.M. Best has removed AIG’s ratings from their negative outlook, following a review of the insurers reserves and also taking into consideration the hiring of Duperreault.

AIG continues to take positive steps, with Duperreault planning to grow the insurer (rather than break it up as many had previously called for) and the company’s AIG Philippines unit setting aside $2.5 billion for property insurance as a result of an expected infrastructure boom in the country.

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