The previously announced Q4 reserve charge ended up coming in at $5.6B pretax, significantly larger than his estimate of $3B, says Barclays' Jay Gelb.
He's got his eye on A.M. Best - if the agency were to affirm its 'A' rating on AIG, it would remove a negative overhang. If, however, there's a downgrade to 'A-,' it could result in a slowdown or cessation of buybacks as the insurer looks to preserve capital
In a worst-case scenario, says Gelb, it a downgrade could require the need for a dilutive capital raise.
In one bit of good news, S&P last night said it would take no immediate rating action on AIG.
The sell-side reviews are coming in, and they're not pretty.
It's now "extremely difficult" to have confidence in AIG's underwriting, says Credit Suisse's Ryan Tunis, who has been a bull on the stock. He does, however give management credit for executing on expense savings, capital returns, and legacy asset sales. He reiterates his Outperform and $75 price target.
KBW's Meyer Shields takes note of the company's "uniquely poor reserving track record," and he's skeptical of CEO Peter Hancock's claim that severity trends are an issue for the broad U.S. property & casualty market.
FBR's Randy Binner says the focus is now on whether commercial lines margins targets can hold given the soft P&C market.
Also of note: The company cut its 2017 ROE target by 50 basis points to 9.5%.
Q4 after-tax operating loss of $2.787B or $2.72 per share vs. loss of $1.318B and $1.07 per share one year ago. This year's result included a $5.6B, or $3.56 per share impact from prior year adverse reserve development. The deal with Berkshire's National Indemnity covers 80% of this.
Normalized ROE of 4.8% during Q4 compares to 6.6% a year ago. Full-year normalized ROE of 7.5% vs. 6.9% in 2015.
Expense reduction: Full-year general operating expenses fell 13.4% to $11B; excluding the sold AIG Advisor Group, operating expenses fell 9.7%.
$13.1B returned to owners in 2016, including $3B of common stock buybacks, $46M in warrants. Another $1.2B of stock has been repurchased thus far in 2017. The buyback is boosted by $3.5B, bringing remaining authority to $4.7B.
Testifying before the Senate this morning, Fed Chair Janet Yellen says it would be "unwise" to delay on rate hikes, thus suggesting a move in March could be more likely than previously thought.
The 10-year Treasury yield is higher by 6.7 basis points to 2.50%, and Fed Funds futures are pricing in slightly more hawkish Fed policy for the remainder of the year.
Also notable was lack of much mention of regulation in Yellen's opening remarks. There had been thought that Yellen would use the opportunity to push back against Trump administration and congressional calls for a sizable rollback of Dodd-Frank and the stress test regime.
Welcoming news of higher rates (and no news yet on regulations) is the financial sector: (XLF +0.7%), (KBE +1.2%), (KRE +1.3%)
Bank of America (BAC +2%), Wells Fargo (WFC +1%), JPMorgan (JPM +1.2%), Citigroup (C +1.5%), Goldman Sachs (GS +1.2%), Morgan Stanley (MS +2%), Regionsl Financial (RF +1.8%), U.S. Bancorp (USB +0.2%), KeyCorp (KEY +1.5%), PNC Financial (PNC +0.8%), Fifth Third (FITB +1.6%), Lincoln National (LNC +1.7%) MetLife (MET +0.8%), AIG (AIG +0.8%)
The dollar (UUP +0.4%) has also moved higher since Yellen took the stage.
"We no longer believe AIG (AIG -1.1%) will meet our fixed-charge coverage threshold to support nonstandard notching between operating subsidiaries and the holding company," says S&P, cutting the insurer's rating to BBB+ from A-. The outlook is stable.
The rating on AIG's operating subsidiaries remain at A+.
S&P expects AIG will fall short of a 7x-8x fixed-charge coverage ratio for 2016-17, says the agency's Tracy Dolin, noting the Q4 reserve charge the company announced as part of its reinsurance deal earlier this month.
Thanks to ongoing challenges AIG faces in improving operating performance, S&P doesn't expect to be boosting its rating in the next 24 months.
Taking note of the reinsurance deal with Berkshire Hathaway and related Q4 reserve charge, A.M. Best puts AIG's (AIG -1.1%) credit rating under review with negative implications. "The timing of this latest charge highlights the challenges that AIG management continues to face in reserving, pricing, and handling this longer tail commercial lines business, and the effectiveness of the group’s enterprise risk management function."
Whether this might strengthen activists' hands remains to be seen.
While the deal with Berkshire's National Indemnity and sizable Q4 charge indicate AIG's (AIG +0.1%) reserve deficiency is larger than expected, says Credit Suisse's Ryan Tunis, the agreement does put to rest the "greatest single uncertainty" hanging over the stock.
The "deck is finally cleared" in terms of reserves, and Tunis looks for a material re-rate in the stock.
The Q4 charge, however, is likely to cut $1 per share from book value, create a $0.27 hit to EPS, and trim 50 basis points from ROE - this should be more than offset by the positive cost of equity implications. Tunis rates the stock an Outperform.
KBW's Meyer Shields says the deal "finally addresses AIG's reserve overhang." He too rates the shares Outperform.