AIG share buyback as the company resists calls for breakup: Insurance giant, American International Group, is planning to buy back $3 billion in shares as it resists a call for it to break up its business to improve profitability.
AIG share prices had dropped 12% this year so far, but rose 1.5% in after-hours trading. Net income for the second quarter increased $0.1 billion from the same period last year to $1.91 billion. Not shabby by any means, and ending losses for each of the last three quarters. These losses had forced the company to downsize its workforce and sell off some assets.
According to AIG, this represents “strong improvement” and the firm has just revealed plans for a $3 billion share buyback to avoid breaking itself up. Chief executive Peter Hancock stated that the firm has improved its performance at a faster rate than expected, and it should reach its financial targets for 2017. The company’s main problem has been the low interest rate, and AIG has been struggling along with its competitors to make money. Like many insurance companies, AIG has had to invest in bonds in order to pay out potential claims.
The AIG share buyback decision was made by the firm after its second-quarter profit increased by 6.3%, although this was assisted by asset sales. The $1.91 billion net income figure relates to $1.61 a share. The operating profit of $0.98 per share (excluding some investment results) was higher than estimated.
AIG Asset Sales Help Pay Catastrophes
Hancock had been pressured by Carl Icahn and John Paulson to break up the company and focus on specific operations, principally the property-casualty business. Icahn and Paulson are billionaire activists, and investors in the company who were brought onto the board of AIG February. It was Icahn who prompted the company to make the recent asset sales.
The company has had to deal with more catastrophes than normal at this time of year. Court rulings for liabilities on workers’ compensation policies in Florida were much higher than expected. The insurance business also suffered through payments required to cover overseas earthquakes, storms in the U.S. and Canadian wildfires. Costs associated with these events rocketed by 60% to $353 million.
There were other negative issues that affected company profit, but the business has recovered sufficiently to plan the $3 billion share buyback. This will reduce the level of equity funding, and reduce the burden of carrying equity (with its corresponding dividend payments) that is no longer needed. This action is expected to improve the financial strength of AIG and enable it to continue without any break-up of its operations.
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