CEO Brian Duperreault’s overhaul of American International Group, the insurer bailed out during the financial crisis, is gaining momentum with a lower tax rate signed into law by President Trump and the prospect of more profitable growth after completing its $5.6 billion purchase of Validus.
“I’m confident in the changes that are taking place at AIG,” Duperreault said Friday, despite a fourth-quarter marred by catastrophe losses of $572 million from California’s wildfires and a charge of more than $6 billion related to the new tax law.
While Congress’s reduction of the top corporate rate to 21 percent from 35 percent forced companies with tax credits related to previous operating losses to write down their value, “we believe the tax bill will be an overall net benefit over the long term and look forward to the benefits of additional economic growth,” Duperreault said.
The 70-year-old is attempting to turn around a company still regaining its strength after a $182 billion government bailout during the 2008 financial crisis when the value of securities for which it had provided insurance plummeted. An aide to legendary AIG chief Maurice “Hank” Greenberg, Duperreault climbed the AIG ladder in the 1970s and ’80s before moving on.
Since returning in May 2017, he has convinced the Trump administration to drop the insurer’s designation as a systemically important firm, or one likely to imperil the financial system if it collapsed, and made acquisitions including Validus, whose $784 million in debt will be added to AIG’s obligations.
The company expects to complete the deal mid-year, and analyst Cathy Seifert of CFRA Research told the Washington Examiner that it should be relatively smooth. The Bermuda-based insurer, which posted double-digit revenue gains in two of the past three years, should help deliver the higher sales that AIG shareholders want, she added.
“They’ve got to start growing their top line,” she said, and “I don’t think they’re going to get the kind of top-line growth” without acquisitions “that they need to satisfy investors.”
Indeed, such deals will be a priority, for now, over stock buybacks, said Duperreault, who has promised to grow the company rather than break it up as the activists who spurred his predecessor’s departure urged. AIG repurchased none of its shares in the fourth quarter, and the total for the year dropped 45 percent to $6.27 billion.
“It really gets down to, ‘Can I find opportunities to use the capital in a way that’s accretive and structurally improving?'” he added. “If I can’t, we have the stock buyback as a tool.”
While his outlook is upbeat, Duperreault conceded that the fourth quarter was “meaningfully impacted” by catastrophe losses and said he expects the company to consistently invest in reinsurance, policies that curb the exposure of insurers to such events, in the future.
Reinsurance “is an important tool for AIG to best manage its portfolio of risks,” he said. “It provides another set of eyes on underwriting, helps to manage volatility, and control loss exposure.”
That should assure investors that though the new CEO is returning AIG to some of its roots, “prudent risk management is also part of his go-forward strategy,” Seifert said.
Excluding one-time costs, AIG posted net income of 57 cents a share in the fourth quarter, lower than the 71-cent average estimate from analysts surveyed by Bloomberg.
Its shares climbed 3.3 percent to $60.22 on Friday as broader markets rebounded after two 1,000-point drops on the blue-chip Dow Jones Industrial Average in less than a week.
Duperreault’s progress in restructuring the company, along with higher interest rates after five Federal Reserve rate hikes since 2015 and a better market for property and casualty insurance, may all drive the company’s share price going forward, said Seifert, who maintained a 12-month price target of $70.
