American International Group’s actions this week to pare down without resorting to a breakup appear to have fallen on deaf ears among several industry observers.
The insurance carrier announced Tuesday that it would sell off its broker-dealer network, partially spin off its mortgage-insurance business, significantly cut costs and return at least $25 billion to shareholders over the next two years.
AIG CEO Peter Hancock emphasized the selling of 19.9% of United Guaranty in an IPO – the first step to a complete sale – and the sale of
AIG Advisor Group to Lightyear Capital and PSP Investments. The company also committed to cutting expenses by $1.6 billion over the next two year.
AIG’s new businesses are now expected to produce return on equity better than 10% by 2017.
However, anything less than the three-way breakup proposed by activist investor Carl Icahn is unlikely to please most shareholders, said Sanford C. Bernstein analyst Josh Stirling.
“The company is showing incremental urgency and is clearly listening to its shareholders, but its efforts appear to stop short of being radical or transformational,” Stirling wrote in a note to clients. “Sadly, this was not the ‘big bang’ from management we suspect most shareholders were hoping for.”
Stirling added that “a more radical breakup” is needed both to “tame its underwriting and expense problems” and to get out from under the thumb of federal regulations applying to SIFI-designated companies, otherwise known as “too big to fail” companies.
Reuters Breakingviews columnist Antony Currie was also unimpressed, stating that the company’s latest moves “will only take the mega-insurer toward mediocrity.”
“Hancock’s plan is to elevate return on equity next year to a subpar 9%,” he wrote. “
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%, just ahead of what
Travelers achieved.
“All told, this restricting story probably has further to go.”
Hancock dismissed these criticisms in a conference call Tuesday, however – in particular those related to a SIFI designation, which he called “a complete red herring.”
“The creation of more nimble, standalone business units that can grow within AIG or be spun out or sold allows us to do what is in our shareholders’ best interests,” he said.
At least some financial analysts backed Hancock. In a Tuesday note to clients, Citi analyst Todd Bault called the plan “as aggressive as possible, short of full breakup,” and praised AIG’s future proposals as a way to measure management success.
