Coverage: AIG restructures after pressure mounts

After three months of public criticism from activist investor Carl Icahn, the American International Group announced a spinoff of its mortgage insurance unit along with other sweeping changes to fend of his attacks momentarily.

Reuters had the day’s news:

American International Group said it would spin off its mortgage insurance unit and sell its broker-dealer network as part of the sweeping changes it has been promising shareholders as it fends off activist investor Carl Icahn.

The insurer also said on Tuesday it would cut $1.6 billion of costs and return at least $25 billion to shareholders over the next two years.

AIG’s cost structure has remained a cause of concern for investors as rock-bottom commercial property and casualty insurance rates across the industry have battered underwriting operations.

The insurer said it planned to streamline its business through divestitures, including the sale of AIG Advisor Group, a network of independent broker-dealers, to Lightyear Capital and PSP Investments.

AIG will also sell up to 19.9 percent of United Guaranty Corp. in mid-2016 as a first step toward separating the business entirely.

The company said it would overhaul its operational structure to improve performance and make it easier to take parts of its commercial or consumer businesses public or sell them if they underperform.

Liz Moyer of The New York Times detailed the company’s changes:

While the company is not ruling out more radical changes, “now is not the time to be shortsighted and simply react to the demands of those who challenge us,” A.I.G.’s president and chief executive, Peter Hancock, said in a memorandum to employees on Tuesday.

“The creation of more nimble stand-alone business units that can grow within A.I.G. or be spun out or sold allows us to do what is in our shareholders’ best interests,” Mr. Hancock said in a statement announcing the changes.

The company will start an initial public offering for United Guaranty by midyear with the eventual goal of full separation. It is selling A.I.G. Advisory Group, with 5,200 independent advisers and 800 employees, for an undisclosed amount to Lightyear Capital and the Canadian pension investment manager PSP Investments.

In addition, it is moving some underperforming older assets into a new Legacy business to be run by Charlie Shamieh, who leads the life, health, and disability insurance business.

A.I.G. also announced a $25 billion stock buyback and dividend plan for shareholders over two years and the addition of $3.6 billion before taxes to its loss reserves.

The plan may not be enough to satisfy the demands of increasingly impatient shareholders.

Leslie Scism and Lisa Beilfuss of The Wall Street Journal explained how the insurance giant has been under mounting pressure since it almost collapsed in 2008:

AIG nearly collapsed into bankruptcy court in 2008 amid the worsening global liquidity crunch, and to pay back its nearly $185 billion government bailout, it sold over 50 businesses and other assets, generating more than $90 billion in proceeds, according to its figures.

When the crisis hit, AIG was a globe-straddling financial-services behemoth with an airline-leasing unit and a large financial-products unit, among other non-insurance businesses. In selling assets, it scaled back mostly to world-wide sales of property-casualty insurance, both to businesses and consumers, and a U.S.-focused life-insurance and retirement-services business.

Lately, AIG has been under mounting pressure to improve results. Mr. Icahn, who last year called AIG “too big to succeed,” in November disclosed a stake of more than 42 million AIG shares, translating to $2.61 billion and roughly 3% of the company.

Together with fellow billionaire John Paulson, Mr. Icahn has called for AIG to pursue a split into three separate companies, arguing that each of those companies would be small enough to avert the “systemically important financial institution,” or SIFI, designation, which carries heightened scrutiny and requirements to hold robust capital buffers against losses. 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 board Chairman Mr. Steenland said “being a nonbank SIFI is not currently a binding constraint on return of capital.” He said a “lack of diversification benefits would reduce capital available for distribution, and there would be a loss of tax benefits.”