Insurer AIG is selling its broker-dealer segment, starting an initial public offering for its mortgage-insurance division and slashing expenses after coming under pressure from activist investor Carl Icahn. The New York-based company was built into the world’s largest insurer by Maurice “Hank” Greenberg, and each of the five men who held the CEO post since his 2005 departure has grappled with the insurer’s complexity.
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The company said the IPO for up to 19.9 percent of United Guaranty Corp.is a first step toward a full separation.
Hancock also said the company is to cut another $1.6 billion of expenses, increase leverage slightly to match the level at rivals and shift its asset allocation as other ways to hit its capital return target. AIG shares rose about 2 percent in early trading, a remarkably small gain for such a remarkably large capital-return plan. Doing so may result in civil and/or criminal penalties.
AIGs fundamental problem is very poor P&C profitability, and absent really fantastic price tags, we really dont see the point of selling better-performing businesses so it can buy back more shares of the remaining underperforming businesses, KBWs Meyer Shields said in a note to investors dated Sunday.
AIG said it would overhaul its operational structure, making it easier to take parts of its commercial or consumer businesses public or to sell them if they underperform.
AIG CEO, Mr. Peter Hancock, is of the opinion that the demand of increasing profitability from investors is understandable, but breaking up the company won’t benefit shareholders in the long run.
AIG’s near collapse in 2008 and the government bailout that followed drove regulators to consider some non-bank companies as “too big to fail”. Icahn also believes this would allow AIG to return $20 billion in capital to shareholders without affecting credit ratings, the Wall Street Journal reported in October.
Separately, the company also announced the addition of $3.6 billion before taxes to its loss reserves. He said in an open letter to AIG’s board last week that he wouldn’t be satisfied with “small-scale asset sales and incremental cost-cutting”. The one thing that doesn’t impress Icahn with AIG’s present corporate structure is that it puts the insurer in the category of systematically important financial companies in the U.S. That means that the regulator requires the company to maintain a higher capital cushion than what Icahn deems necessary.
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The action plan might have been a well-meaning attempt to satisfy shareholders, but it was far from being a bold move required to turn the insurance company around, especially when it comes to AIG’s flailing property casualty business.
