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American International Group Inc. on Tuesday said it plans to undertake an initial public offering of up to 19.9% of its United Guaranty Corp. mortgage insurance unit as a first step toward a total separation of the unit.
In a video posted on AIG's website, AIG President and CEO Peter Hancock outlined the steps the company plans to take over the next two years to increase its profitability. In all, AIG plans to return at last $25 billion in capital over the next two years.
ln addition to the United Guaranty IPO planned for later this year, AIG has agreed to sell its AIG Advisor Group Inc. unit of independent broker-dealers to New York-based Lightyear Capital L.L.C. and Canadian pension investment manager PSP Investments.
Mr. Hancock said that AIG hopes in the next two years to cut expenses by $1.6 billion, improve its commercial insurance combined ratio by 6 points, with an improvement of 4 points being achieved this year, and reduce the geographic extent of its personal lines business to 15 countries.
The company also plans to change its management model “to improve transparency, accountability and operating performance improvement throughout the organization,” according to an AIG statement released Tuesday. The new structure, will consist initially of nine “modular” business units in an effort to “decentralize decision-making, provide more accountability to business leaders, and allow for migration to a more variable cost structure,” according to the statement.
Within AIG's commercial segment, the modular business units will be liability and financial lines, property and special risks, U.S. commercial and Europe commercial. Inside the consumer segment, the modular units will be U.S. individual retirement, U.S. group retirement, life, health and disability, personal insurance (property/casualty) and Japan, according to the statement.
In addition, the company is creating a new “legacy” portfolio composed of nonstrategic assets and businesses that it intends to exit or run off. “This portfolio will be managed in a way to monetize assets in a timely manner in order to return capital to shareholders,” said the statement, adding that AIG will also introduce new disclosures later in 2016 to clarify sources of financial returns and enhance focus on a goal of releasing $9 billion of capital by 2017.
High-profile investor Carl Icahn has been calling for AIG to split itself into three companies — property/casualty, life and mortgage insurance — and has been highly critical of AIG's senior management.
In a separate announcement made Tuesday, AIG said that it has completed its fourth-quarter nonlife loss reserve analyses and has strengthened reserves by $3.6 billion pretax in the fourth quarter of 2015.
“This strengthening of loss reserves primarily reflects adverse development on prior accident years in long-tail classes of business,” said AIG in the announcement. AIG said three classes comprise about 90% of the total charge: U.S. and Canada casualty at $2.2 billion, U.S. and Canada financial lines at $600 million, and runoff lines at $500 million.
Mixed analyst response
Market analysts gave the announcement a mixed reception.
Meyer Shields, a managing director at Keefe Bruyette & Woods Inc. in Baltimore, on Tuesday said there is “enormous importance” on how AIG executes the strategy.
“I think they're taking the right steps, but they have to succeed — and this is a management team that quite frankly hasn't succeeded,” he said.
“Our initial reaction to these is mostly positive,” said Mark Dwelle, an insurance analyst with RBC Capital Markets L.L.C. in Richmond, Virginia, in a note posted Tuesday morning. “We've been a huge proponent of taking a reserve charge to solve the chronic drag on results, so this alone is a big positive in our view and long overdue. We're indifferent about the partial spinoff of UGC; we don't really think it changes the overall picture by much, and the unit has been performing well of late. It certainly won't have a huge effect on capital requirements. The buyback commitment, while positive, had been at least partly assumed by most investors.”
Mr. Dwelle added that the expense savings “don't really plow a lot of new ground,” since they had already been partly announced.
“In our first reflections on the company's proposal, 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,” Josh Stirling, a New York-based senior analyst with Sanford C. Bernstein & Co. L.L.C., said Tuesday in a research note.
“The company's underperforming P&C business faces major challenges, and the company needs bold thinking if it is to finally tame its underwriting and expense problem,” he added.