AIG's Restructuring, Business Exits Could Boost Long-Term Returns
What management believes
American International Group’s (AIG) management has discussed a possible split in its boardroom, so the idea that billionaire investor Carl Icahn suggested to AIG’s chief executive officer (or CEO) on October 28, 2015, is not completely new to the company.
In AIG’s 3Q15 earnings conference call, CEO Peter Hancock said, “Management and the board have carefully reviewed such a separation on many occasions including in the recent past and have concluded it did not make financial sense. We, of course, will meet with him to further share our conclusions and give him an opportunity to elaborate on his views.”
AIG has seen tremendous benefits from combining its life insurance and property and casualty insurance activities. The company is also focusing on reducing costs and complexities. It has sold over 30 businesses for over $90 billion.
AIG believes that the downside of the split outweighs the upside, arguing that the execution of a split would be difficult due to intracompany guarantees.
AIG’s management also believes that the company would lose the advantage of cross-selling some products to corporate clients, especially outside of the United States. Additionally, AIG is skeptical that the breakup would actually result in the removal of federal SIFI (systemically important financial institution) regulations.
Major issues outlined by management
AIG’s SIFI status hasn’t limited its ability to return capital. Since 2012, the company has returned over $26 billion to shareholders by repurchasing 35% of its outstanding shares.
AIG management believes that rating agencies determine how much capital is available for distribution, and agencies have given it significant credit for its scale and diversified business model. As a result of splitting its business, the company could be left with lesser capital for distribution.
The management also argues that because it’s a global entity, its non-bank SIFI compliance is a fraction of its total regulatory compliance costs.
AIG has calculated that breaking up the company would result in a loss of at least one-third of DTA (deferred tax assets) of more than $15 billion. This would depend upon which business or businesses were sold.
As of September 30, 2015, the company’s market capitalization stood at $77 billion, while its book value was $100 billion. In comparison, AIG’s peers are trading at the following multiples:
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Travelers Companies (TRV) — 1.4x
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Ace (ACE) — 1.3x
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Allstate (ALL) — 1.3x
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Chubb (CB) — 1.8x