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AIG: Splitting property and life business would hurt shareholders

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A loss of “diversification benefits” if American International Group Inc. splits its life and property/casualty operations would adversely affect the insurer's ability to return capital to shareholders, a consultant's report concludes.

The report by Marsh & McLennan Cos. Inc.'s Oliver Wyman unit was part of an expanded financial information that AIG filed Monday with the U.S. Securities and Exchange Commission.

The information expands on AIG's Jan. 26 announcement that it would streamline its operations by selling off its AIG Advisor Group broker-dealer network and offering up to 19.9% of its United Guaranty Corp. mortgage insurance unit in an in initial public offering this year as a precursor to selling off the entire business.

AIG's moves come as investor Carl Icahn and others have called for the company to be broken into three separate companies — property/casualty, life and mortgage insurance — in an effort to increase shareholder value and to escape designation as a systemically important financial institution subject to heightened federal regulation.

Mr. Icahn also reportedly has rejected AIG's latest moves.

AIG also announced last week that it would return $25 billion to shareholders over the next two years.

In its report, Oliver Wyman said AIG's ability to return capital to shareholders is governed by, among other things, a pair of constraints: maintaining credit ratings and meeting regulatory capital requirements. The report said with both constraints, cross property/capital and life diversification benefits, which are available only with the company remaining a multiline business, are quantified using “established capital quantification methodologies.”

The report noted that Standard & Poor's Corp.'s consolidated capital model estimates a $5 billion to $10 billion reduction in required capital for AIG as a whole compared with the total stand-alone required capital for the property/casualty and life operations.

It also noted that A.M Best Co. Inc. and Moody's Investors Service Inc. “explicitly make reference to the value of diversification in determining overall credit ratings.” It also says that under an emerging international capital standard, a “field test” mandated by the International Association of Insurance Supervisors showed that AIG would “require substantially less capital as a whole vs. the sum of stand-alone life and P/C entities individually.”

“The loss of diversification benefits if a life/PC spilt occurred would impose additional capital constraints and as a result would likely impact AIG's ability to return capital to its shareholders,” according to Oliver Wyman.

Among other points, AIG said it:

• Expected “run rate” savings of $250 million from laying off 1,400 top staff, 300 of whom already have been laid off;

• Expected $100 million in savings from freezing its pension plan;

• Already has migrated 1,300 employees to lower-cost locations and expected to increase the total to 6,300;

• Would expand the use of reinsurance;

• Would “exit or remediate” underperforming business and that it would revisit rates and terms and conditions of underperforming business.