AIG makes late push toward mediocrity

January 26, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

American International Group is making a renewed push to improve returns. Chief Executive Peter Hancock on Tuesday unveiled plans to sell businesses, slash costs and return $25 billion to shareholders over the next couple of years. That’d be a lot for most companies under siege from an activist like Carl Icahn, who wants AIG to break into three. So far, though, the push will only take the mega-insurer toward mediocrity.

Over the past five years, AIG has delivered a respectable total return to investors, including reinvested dividends, of 37.5 percent. That’s better than both MetLife and Prudential, but a far cry from Travelers and its 109 percent.

That also masks the weakness of the earnings in AIG’s main business. Hancock’s plan is to elevate return on equity next year to a subpar 9 percent. MetLife is expected to do slightly better, according to Thomson Reuters data, when it reports last year’s profit later this week. Prudential is on track for 14.4 percent, just ahead of what Travelers achieved.

AIG’s new target is at least an improvement on recent years. It also explains why a breakup appeals to Icahn. Hancock rejects the argument on purely financial grounds. The company’s designation as a systemically important financial institution isn’t onerous, costing only some $150 million extra a year. That could change once regulators finalize the rules for insurers.

Carving up AIG now, though, would mean forgoing almost 10 times that amount in tax benefits. They disappear in three years, however. Credit rating agencies also like diversified insurers. Standard & Poor’s, for example, allows $69 billion AIG to hold more than $5 billion less capital to maintain its A-plus rating than it would if maybe, say, the property and casualty business was separated from life insurance.

In some ways, that merely sets the terms for a smaller AIG. Hancock isn’t ruling out the idea. In fact, he may be providing investors with a roadmap with his reorganization that creates nine separate divisions – and a 10th to hold unwanted assets – with a promise to give out more details about their individual performance. All told, this restructuring story probably has further to go.

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