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The different earnings prospects of the life insurance and property/casualty sectors, long-term trends in the insurance industry and the dilution of various tax benefits all likely played a role in American International Group Inc.’s decision announced Monday to split up its operations, analysts say.
The surprise announcement of the proposed separation of the insurer’s life and retirement and general insurance business was accompanied by a separate and long-expected announcement that Peter Zaffino would take over from Brian Duperreault as CEO of AIG, effective March 1, 2021.
The decision to separate the life business, through an as yet undetermined means, comes five years after AIG’s then management resisted activist investor Carl Icahn’s attempt to force a breakup of the company into three entities.
AIG’s management had indicated previously that benefits remained in preserving its structure due to a deferred tax asset related to offsetting current earnings against past losses, said Andrew Kligerman, a managing director and life insurance analyst at Credit Suisse Services (USA) LLC in New York.
However, “the property/casualty operation seems to be on pace to drive a bigger portion of the earnings as they’ve done a lot to repair the weakness, so perhaps that better positions them to utilize the deferred tax asset,” Mr. Kligerman said.
“The size of the tax benefit has diminished significantly,” said J. Paul Newsome Jr., Chicago-based managing director of equity research at Piper Sandler & Co.
Still, the announcement seems early, said Meyer Shields, Baltimore-based managing director at Keefe, Bruyette & Woods Inc.
“We thought at some point in time this was likely simply because as the property/casualty prospects improved there’s less and less reason to be dependent on a life insurance business that really no other major U.S. carrier has, but we thought they would have wanted to work their way through more of the deferred tax asset and put up more underwriting improvement in terms of its impact on risk-based capital,” he said.
AIG has endured significant problems dating back to the financial crisis and had reported several years of large losses or otherwise disappointing results. The current management team, however, has imposed significant changes over the past three years, Mr. Shields said.
In earnings calls, AIG’s management has detailed how the insurer has re-underwritten much of its book of business, restructured its reinsurance programs and made numerous personnel changes.
“One of the things about property/casualty insurance is that the benefits of repair work take an awfully long time to show up, but I think we are approaching that point,” Mr. Shields said.
The changing outlook for the life and property/casualty sectors may also have driven the decision, he said, noting that property/casualty insurers are seeing rates rise amid a hardening market while very low interest rates and a heightened exposure to equity market pressures are dulling life insurer earnings.
Investors currently view property/casualty insurers more favorably than life insurers because of the hardening market, and it’s a business that can be repriced, Mr. Kligerman said.
If investors want to invest in the benefits of the property/casualty pricing cycle via AIG, they can do it directly if the operations are separated, Mr. Shield said.
In addition, the company may feel that shares in the property/casualty operations could trade as high as the 11 or 12 times earnings that some of its peers are trading at compared with the 7.3 times earnings that the whole company is projected to trade at in 2021, Mr. Kligerman said.
“We think they feel they could derive more value for the shareholders in the property/casualty business if it were standalone,” he said.
And the public announcement of the intended separation may draw out interested buyers, Mr. Kligerman said.
While the diversification of multiline insurers can be helpful because the profitable side of a business can support other areas during difficult periods, it can also create “a moral dilemma,” Mr. Newsome said.
“It’s very easy to assume that one side of the business will make up for whatever you are doing wrong on the other side of the business, and you may take risks that you shouldn’t because you think you can get away with it,” he said, noting that standalone property/casualty insurers and standalone life insurers usually perform better from an investors’ perspective than those with combined operations.
In addition, property/casualty and life businesses are “very different businesses,” and it’s difficult to find senior executives that can manage both sectors equally, he said.
Also, there is little crossover between life insurance and property/casualty insurance, Mr. Kligerman said.
“Years ago, AIG used to talk about cross-selling, but that hasn’t really emerged in any material way.”
Many other previously large multiline insurers, such as Travelers Cos. Inc., Cigna Corp. and Aetna Inc., split up their different units years ago, the analysts noted.
The appointment of Mr. Zaffino to succeed Mr. Duperreault as CEO was not surprising given that he has played a key role in restructuring AIG’s property/casualty business, he was appointed president of AIG earlier this year, and his overall profile has been elevated, Mr. Newsome said.
Mr. Zaffino was well-known to investors when he was at Marsh LLC, where he worked previously with Mr. Duperreault, and during his time at AIG, Mr. Shields said.
“Investors are very familiar with him and I think very comfortable with him,” he said.
AIG’s shares traded higher amid a declining market on Tuesday.