AIG Chief Executive: No Sacred Cows for Company as It Evaluates Divesting Even Biggest Units
January 27, 2016 by David Pilla, news editor, BestWeek: David.Pilla@ambest.com
NEW YORK – American International Group Inc. has a delicate task ahead of it as the group seeks to divest what it considers legacy businesses without losing book value.
“There are no sacred cows,” Chief Executive Officer Peter Hancock said in a conference call on AIG’s strategy. Hancock added AIG is looking to “accelerate” its streamlining efforts over the next two years, and will consider divesting even some of its biggest business units if it makes sense, but added the group will not do so if the timing isn’t right.
Hancock said in the call AIG is also announcing a charge of $3.6 billion pretax in the fourth quarter for legacy and reserve issues.
Among the strategic goals laid out by AIG, the group wants to return at least $25 billion of capital to shareholders over the next two years. To that end, the group named divestiture goals including an initial public offering of up to 19.9% of mortgage insurer United Guaranty Corp. “as a first step towards a full separation,” the group said in a statement.
AIG is also implementing what Hancock calls a new structure composed of nine “modular” business units within its commercial and consumer segments, which he said will decentralize decision-making, provide more accountability to business leaders and allow for migration to a more variable cost structure.
Hancock announced AIG is creating a legacy portfolio that will include 28% of the group’s total book. He said the portfolio includes actively managed runoff businesses and non-core assets.
Hancock said some of AIG’s legacy assets are already being run off in the property/casualty sector, but assets such as life insurance settlements and certain assets at the holding company level are more difficult to unwind.
AIG also announced what Hancock terms “targeted expense reductions of $1.6 billion” within the next two years. According to Hancock, the savings represents 14% of AIG’s 2015 gross general operating expenses. He said this will come from “an acceleration of our current initiatives to rationalize the group’s global structure,” which he said involves the consolidation of activities and “de-layering,” increased utilization of shared services and outsourcing, continued movement of operations to lower-cost locations, and increased automation.
AIG is also planning the sale of AIG Advisor Group to Lightyear Capital LLC and PSP Investments for undisclosed terms. He said the group wants to reorganize into separate business units that will lead to greater transparency and flexibility.
AIG Advisor Group is among the largest networks of independent broker-dealers in the United States, AIG said in a statement, with more than 5,200 independent advisers and more than 800 full-time employees. Advisor Group is comprised of four broker-dealers.
He ruled out a full breakup as AIG looks to simplify its business model. “After careful consideration, AIG believes that a full breakup in the near term” will “distract from the effort to increase shareholder value,” Hancock said, adding the “lack of diversification benefits” that would result from such a move would reduce capital available for distribution and a loss of tax benefits, among other considerations.
Hancock said those considerations will of necessity limit AIG’s ability to move quickly on some of its streamlining efforts. For example, he said international tax considerations would make it difficult for AIG to quickly move on its life insurance assets.
He noted each year, AIG gets about $1.3 billion in benefits from keeping its life and non-life operations together, which makes it difficult to quickly separate the two segments.
In a research note on AIG’s strategy announcement, equity analyst Josh Stirling of Sanford C. Bernstein wrote “it is clear that while the company has shown it is trying to be responsive to its shareholders’ angst, the changes management has introduced appear to be much less dramatic than what we believe AIG’s shareholders were generally looking for.”
On the property/casualty side, Hancock said AIG wants to improve its commercial accident year loss ratio by six points by 2017.
On AIG’s property/casualty operations, Stirling wrote “we’re not sure the firm’s planned changes are significant enough to move the needle and finally fix this underperforming business.” He added AIG’s “underperforming P/C business faces major challenges, and the company needs bold thinking if it is to finally tame its underwriting and expense problems.”
According to Stirling, the focus on modularity “seems an improvement, but the major reserve charge calls into question recent years’ underwriting. While we’re hopeful about the new approach, until they pivot to putting underwriting and margins first, and shrink as much as they need to achieve their goals, we think the turnaround of their P&C business will continue to lag, and the firm to operationally underperform.”
Hancock’s comments in the conference call were in part an answer to investor Carl Icahn, who has been pressing for a breakup of AIG’s businesses (Best’s News Service, Jan. 19, 2016). Icahn had published an open letter to AIG’s board of directors calling for AIG to split up, citing a recent poll of AIG shareholders by Stirling at Sanford C. Bernstein, as well as a separation announcement by MetLife Inc.
Icahn said in a Jan. 19 letter “it is abundantly clear to me there is only one sensible path for AIG to follow: become a smaller, simpler company with a path to de-SIFI.”
AIG’s Hancock said the SIFI designation is not something AIG needs to worry about at the moment, as the group will need to take time to profitably unload some of its assets.
Stirling and colleagues at Sanford C. Bernstein had polled AIG investors on their views of AIG’s strategy and got more than 100 responses that overwhelmingly favor a strategic course change ahead of a Jan. 26 conference call to be hosted by AIG to discuss the group’s strategy (Best’s News Service, Jan. 12, 2016).
Underwriting entities of AIG currently have Best’s Financial Strength Ratings of A (Excellent).
Shares of AIG were trading at $56.20 on the morning of Jan. 26, up 1.52% from the previous close.
