| Peter Hancock
Last week AIG President and CEO Peter Hancock and the board of directors made some moves. Whether those decisions were because of billionaire investor Carl Icahn’s pressure is speculation.
Hancock announced the company is going to sell the AIG Advisor Group and in the same move said they’re spinning off United Guaranty Corp. It’s AIG’s mortgage insurer and 19% of the that firm will be offered to the public.
The plan is for AIG to ultimately get rid of United Guaranty completely.
About AIG Advisor Group sale, Hancock said, “AIG continues to review its business strategy and take actions to become a more efficient, less complex company, able to respond to our clients’ needs with greater agility. We believe advisors, clients, and partners of Advisor Group will benefit from Lightyear's and PSP Investments’ ownership of the independent business, and we look forward to a continued relationship with Advisor Group as an important distributor of AIG products.”
At the announcement, Hancock said more moves may be in the works but now is not the right time. Two reasons … first, he and the board are waiting to see the full effects of the regulations coming down because of AIG’s systemically important financial institution (SIFI) designation. Second is tax considerations and how the company performs in the coming year or two. They will precede the spinoff of larger commercial insurance and consumer insurance businesses.
While those considerations are being made, Hancock plans to reorganize. He’s turning the company into nine modules and each will have its own financial metrics. Hancock is also cutting expenses and hopes to save $1.6 billion by moving company operations to lower-cost sites and with more outsourcing.
This is a two-year plan and Hancock said AIG’s focus is to increase the value of stock to shareholders. That plan will return $25 billion to shareholders in the next two-years in addition to the $12 billion they got back in 2015.
While making the announcement, Hancock said there are no “sacred cows” in the company and everything is under the microscope. However, he refuses — still — to split AIG into three separate units as Icahn wants.
As a reminder to those who don’t remember or to those not up to speed on the story, the billionaire owns a huge percentage of the company and wants AIG split into three separate companies:
• Property casualty
• Mortgage insurance
AIG board chairman Doug Steenland said the board rejects the idea and says a modest divestiture makes more sense at this point. “After careful consideration, AIG believes that a full breakup in the near term would detract from, not enhance, shareholder value. A lack of diversification benefits would reduce capital available for distribution, and there would be a loss of tax benefits. Being a non-bank SIFI is not currently a binding constraint on return of capital,” Steenland said.
No specific response to the plan from Icahn. He did, however, continue criticism of Hancock and said steps like selling smaller assets and minor cost-cutting isn’t going to do the job or ultimately satisfy shareholders.
“If this occurs then the little credibility management now has will be lost. It is my hope that after the events outlined above and in light of management’s poor performance over the last several years, particularly in the property & casualty (P&C) segment, the board will take matters into its own hands if management still resists drastic change,” he said.
Reaction from the insurance community was instantaneous. David Havens of Imperial Capital said, “The $25 billion capital return is eye-catching to say the least. They are navigating a middle ground that preserves most of AIG as it is now, but offers the flexibility to spin off or sell units in the future.”
Josh Sterling is an analyst for Sanford C. Bernstein & Co. agrees. He added, “After a decade of trying to fix the firm, given the substantial structural disadvantages unique to AIG, we believe breaking up AIG and selling it off piece by piece to its structurally advantaged peers is simply a more realistic path to creating shareholder value.”
While those comments are positive, some say spinning off United Guaranty is not necessarily a good idea. It gave AIG $464 million in pretax operating income in the first three quarters of 2015. That’s 12% of the firm’s total income from commercial insurance.
Meyer Shields of Keefe, Bruyette & Woods said, “I still don’t see the benefit of spinning part or all of UGC — it’s a profitable business, and the only purpose seems to be to fund the [stock] buyback. In other words, selling good businesses to buy more of the remaining bad businesses.”
Shields said AIG’s real problem is poor profitability, “and absent really fantastic price tags, we really don’t see the point of selling better-performing businesses so it can buy back more shares of the remaining underperforming businesses. Mortgage insurer valuations have compressed significantly over the past two years, so the timing of this planned spinoff is also very far from ideal.”
And he pointed out this may not satisfy any SIFI related capital requirements that will be placed on AIG.
Paul Newsome is a managing director at Sandler O’Neill and Partners. He said this isn’t going to placate Icahn or others calling for the breakup of AIG into three separate companies. “I am impressed by the plan. It’s pretty ambitious, a notable effort here to appeal to shareholder interests. They overall did a pretty good job of presenting it. But it’s not perfect, and there will most definitely be some folks among the investment community that won’t be happy, because it does not directly address the desire by some to get rid of the [systemically important financial institution] designation, or split the company into pieces,” he said.
Meanwhile, in reaction Standard & Poors put AIG’s holding company on a credit rating outlook negative.
“The revised outlook reflects the potential for weaker earnings due to the divestiture of UGC, reduced investment income as capital is returned to shareholders, and the lack of improvement in projected interest expense in 2016 and 2017. It is not yet clear to what extent the existing explicit support provided by AIG will be modified or withdrawn, or whether the stand-alone credit characteristics, including capitalization, may change.”
Source links: Insurance Journal two links, link 1 and link 2, Carrier Management two links, link 1 and link 2, Insurance Business America