Moody’s Says Splitting Up AIG Would Be Credit Negative

November 2, 2015

Moody’s Investor Service today said that a break-up of American International Group (AIG) and removal of its systemically important financial institution (SIFI) designation as called for by activist investors would have a negative effect on the insurer’s debt. Splitting the company would remove the diversification benefit of its multi-line insurance operations and of the capital and risk management oversight by the U.S. Federal Reserve of SIFIs, both of which the rating agency said are positive credit factors now.

Also, a step-up in share repurchases would also be credit negative to the extent that it reduced the capital adequacy of the ongoing businesses, Moody’s said.

Moody’s was responding to activist investor Carl Icahn’s recent letter to AIG CEO Peter Hancock urging him to split AIG into three separate companies – a property casualty, life and mortgage insurer. Another activist investor, John Paulson, joined with Icahn to urge the insurer to split up to avoid the SIFI tag, which brings with it regulation by the Federal Reserve.

In the letter he published last Wednesday, Icahn also accused CEO Hancock of failing to provide decisive leadership for the company.

Hancock defended his approach in a statement. “We have taken important and significant steps to reposition AIG by both simplifying and de-risking the company, and realizing attractive valuations from non-core asset sales,” he said. “We remain on course and are determined to continue and accelerate these efforts.”

The rating agency endorsed the path AIG has been taking on divestiture.

Moody’s said AIG currently enjoys “healthy liquidity” thanks to its leading market positions in its major segments and its diversification. It is one of the few carriers that can serve multi-national accounts with complex insurance needs, Moody’s said. The strength of AIG’s life operations, among the largest in the U.S., are “tempered by the company’s record of weak profits and volatile reserves in property/casualty insurance, its above-average exposure to structured and alternative investments, and the challenge of risk management across its diversified business portfolio,” the agency said.

While the Fed is still developing rules for non-bank SIFIs, according to Moody’s these rules will “likely include rigorous capital adequacy and liquidity tests, plus extensive requirements for risk management structures and processes.” This will amount to group-wide regulation that Moody’s sees as credit positive, even though it may somewhat limit the company’s management of its operations and capital structure.

Moody’s commended AIG for how it has simplified its business portfolio since the financial crisis of 2008, completing more than 30 divestitures for aggregate proceeds exceeding $70 billion. “In applying these proceeds, AIG has balanced the interests of creditors and shareholders, leading to significant debt reduction and improving financial leverage and fixed charge coverage metrics,” Moody’s said.

For the remaining businesses, Moody’s said AIG has “shifted its focus toward higher-value offerings, such as insurance for multi-national accounts and certain consumer lines, from relatively volatile product lines, notably long-tail U.S. casualty insurance.” AIG has also been improving its risk selection, personnel, claims handling and operating efficiency — changes that have raised expenses but that Moody’s said it expects AIG to be able to reduce over time. “Splitting the group into three separate companies would not necessarily facilitate or accelerate the reduction in aggregate expenses,” the rating analyst said.

The Wall Street Journal last week reported that AIG directors have been discussing the sale of the company’s mortgage insurance business “for a while” but “no final decision has been made about the unit.” AIG’s mortgage insurance unit is Greensboro, North Carolina-based United Guaranty.

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