American International Group (AIG) CEO Peter Hancock, who announced the sale of the company’s AIG Advisor Group and a partial (19 percent) spin-off of mortgage insurer United Guaranty Corp., said AIG is open to further divestiture, even of its biggest divisions, however now is not the right time.
Hancock told analysts that before selling off additional businesses or splitting the company, AIG prefers to wait to learn the full regulatory effects of its systemically important financial institution (SIFI) designation and to focus on its two-year plan for increasing shareholder value. The plan promises returning at least $25 billion in capital to shareholders over the next two years, on top of the $12 billion returned in 2015.
Hancock said any possible sale or spinoff of the larger Commercial Insurance and Consumer Insurance businesses would depend on tax considerations and their performance.
In addition to the broker-dealer and mortgage business divestitures, the plan calls for reorganizing the remaining AIG businesses into nine modular units, each with its own financial metrics, and taking steps to cut expenses by $1.6 billion including continuing to move operations to low cost sites and use of outsourcing.
Activist investor Carl Icahn has been pressuring Hancock to shrink the company in order to shed its SIFI designation, which can lead to tighter capital rules from the Federal Reserve. MetLife, also a non-bank SIFIs, announced recently that it will spinoff its domestic retail unit to limit regulation tied to its SIFI designation. Also, General Electric Co. plans to sell its commercial lending business and a Utah bank to exit its SIFI designation by March.
But Hancock said his company has already taken some of the “de-risking steps” other non-bank financial firms are now announcing to avoid restrictions posed by SIFI.
Hancock said AIG believes there are “important tax and diversification reasons that preclude major divestiture in the near term.”
“Worrying about about a SIFI designation today is a distraction” from its plan for profitability, Hancock said.
He said SIFI risk is “maybe number 15 on the list” of things the company needs to do to improve value to shareholders.
He said that while there are “no sacred cows” when it comes to divestiture or improving value, reorganizing into nine modules will eventually help make it easier for “anyone to evaluate the units including potential acquirers.”
He rejected again the idea of splitting AIG now into separate property/casualty, life and mortgage insurance businesses.
“A modest pace of divestitures is what makes sense” at this time, according to Hancock.
His position has the support of the AIG board of directors.
“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,” Chairman Doug Steenland said in a statement.
Icahn has not yet responded to Hancock’s plan. However, last week continued his criticism of Hancock and he said “small-scale asset sales and incremental cost cutting” would not be enough to satisfy shareholders.
“If this occurs then the little credibility management now has will be lost,” Icahn said in a statement. “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.”
Icahn has vowed to organize shareholders to replace Hancock with a CEO willing to follow his plan to split the insurer into three.
Hancock maintained that the property/casualty operation, while it has fallen short in some areas, has made progress in reducing its accident ratio and cutting troublesome casualty lines. The current goal is to further reduce the commercial lines accident year loss ratio, which has been cut by 10 points in recent years, by six additional points. Hancock said it takes time to improve this business since it has long tails in the U.S.
In terms of improving the property/casualty operations, Commercial CEO Robert Schimek said AIG would continue to concentrate on improving its U.S. casualty business as well as its global property business by “narrowing its focus” and by greater use of reinsurance and loss mitigation resources.
Narrowing its focus could mean shrinking or withdrawing from certain lines of business or countries and dropping customers for whom AIG is not their most valuable insurance partner.
“We think there are lines that despite our efforts we should exit,” he told analysts. In addition he said there are clients that buy only one product from AIG and that single relationship may not fit with AIG’s desire to be its clients “most valuable insurer.”
Geographically AIG operates in 90 countries and while Schimek said it is important for AIG to maintain its multinational platform, there are some countries where AIG may narrow its focus.
Schimek would not name lines or countries where AIG might pull back.
In the area of consumer insurance, AIG hopes to expand on its success in the high net worth market while reducing its footprint for individual products in 15 countries.