AIG has announced a series of strategic actions, organizational changes, and operating improvements to create a leaner, more profitable and focused insurer.
The Board of Directors has committed to return at least $25 billion of capital to shareholders over the next two years via buybacks and dividends without compromising the utilization of the Company’s deferred tax assets (DTA); approved the IPO of up to 19.9% of United Guaranty Corporation (UGC) as a first step towards a full separation; and approved the sale of AIG Advisor Group to Lightyear Capital LLC and PSP Investments.
In addition, the Board approved a number of organizational changes, including the creation of nine “modular” business units with greater end-to-end accountability, each with its own specific financial metrics. AIG will create a new “legacy” portfolio to hold non-strategic assets and has appointed Charlie Shamieh as Legacy CEO.
In related operational actions, AIG also announced targeted expense reductions of $1.6 billion within two years, representing 14% of 2015 gross general operating expenses; a target of improving the Commercial P&C accident year loss ratio by six percentage points; and a consolidated ROE target of ~9% by 2017, reflecting 10.3% to 10.7% in the operating portfolio.
“With these actions, AIG has taken another major step in simplifying our organization to be a leaner, more profitable insurer, while continuing to return capital to shareholders and improve shareholder returns,” said President and CEO Peter Hancock. “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.”
Douglas M. Steenland, AIG’s Non-Executive Chairman, said, “The Board’s actions reflect its full support for the plans that Peter Hancock and his management team have put forward, and we are aligned that these steps will deliver strong results while creating more options for shareholder value creation in subsequent years.
“AIG is committed to serving all its stakeholders by delivering first quartile total shareholder returns to its shareholders; providing risk expertise and dependable long-term balance sheet strength for its customers; having a culture of strict adherence to both the letter and spirit of regulatory requirements; and maintaining an environment that attracts and retains world-class employees.
“After careful consideration, AIG believes that a full breakup in the near term would detract from, not enhance, shareholder value. A lack of diversification benefits would reduce capital available for distribution, and there would be a loss of tax benefits. Being a non-bank SIFI is not currently a binding constraint on return of capital,” said Mr. Steenland.
AIG is committed to returning at least $25 billion of capital to shareholders over the next two years (via buybacks and dividends), on top of the $12 billion returned in 2015. The capital return is expected to be sourced from a combination of improved operating performance, divestitures, reinsurance transactions, a shift in asset allocation, a modest increase in leverage, and the release of capital over time from low-earning legacy assets. This commitment to returning $25 billion of capital can be achieved notwithstanding the strengthening of reserves and associated capital contribution announced today.
IPO of up to 19.9% of United Guaranty Corporation (UGC)
AIG will pursue an initial public offering of United Guaranty Corporation (UGC) in mid-2016 to sell up to 19.9% of the outstanding shares, subject to regulatory and GSE approval, as a first step towards a full separation.
Divestiture of AIG Advisor Group
AIG has announced the sale of AIG Advisor Group to Lightyear Capital LLC, a New York private equity firm focused on financial services, and PSP Investments, one of Canada’s largest pension investment managers. The transaction is expected to close in second quarter 2016.
“Modular” Business Units
AIG is overhauling its management model to improve transparency, accountability and operating performance improvement throughout the organization. The new structure, composed initially of nine “modular” business units within AIG’s Commercial and Consumer segments, will decentralize decision-making, provide more accountability to business leaders, and allow for migration to a more variable cost structure. The reorganization will give AIG options to retain and grow the businesses, or take public or sell the units if they don’t adequately contribute to financial targets, or if it becomes apparent that they are worth more outside of AIG than within, or if they represent an efficient means of returning capital to shareholders. The Company could consider the separation of even the larger modular units of its Commercial and Consumer segments over time with utilization of the DTA, contingent on improvements in the credit risk profile and operating performance. Within AIG’s Commercial segment, the modular business units will be Liability and Financial Lines; Property and Special Risks; U.S. Commercial; and Europe Commercial. Inside the Consumer segment, the modular units will be U.S. Individual Retirement; U.S. Group Retirement; Life, Health and Disability; Personal Insurance (P&C); and Japan.
New “Legacy” Portfolio Management
The Company will create a new “legacy” portfolio composed of non-strategic assets and businesses that it intends to exit or run off. This portfolio will be managed in a way to monetize assets in a timely manner in order to return capital to shareholders. The Company will also introduce new disclosures later in 2016 to clarify sources of financial returns and enhance focus on a goal of releasing $9 billion of capital by 2017.
AIG is also undertaking further substantial expense reductions of $1.6 billion within two years, representing 14% of 2015 gross general operating expenses. The savings will be driven by an acceleration of our current initiatives to rationalize the Company’s global structure, including consolidation of activities and de-layering, increased utilization of shared services and outsourcing, continued movement of operations to lower-cost locations, and further increased automation.
Aggressive actions will be taken to improve the Commercial P&C accident year loss ratio by addressing unprofitable clients purchasing one or two products, expanding and optimizing the use of reinsurance, and exiting or remediating targeted segments of underperforming portfolios. These actions are expected to result in accident year loss ratio improvement of six percentage points by 2017. In addition, we will undertake actions to sharpen our consumer focus and improve profitability, including narrowing our footprint in Personal Insurance, expanding reinsurance utilization for inefficient segments of the U.S. life business, achieving maximum benefits from investments in Japan, and growing our U.S. Retirement business.
AIG has set a consolidated normalized ROE target of ~9% by 2017, reflecting 10.3% to 10.7% in the operating portfolio. The increase will be driven by the operating improvements, capital actions and profitable growth outlined in the strategic plan. At the same time, legacy assets and liabilities will release low-earning capital over time.
Mr. Hancock concluded, “We have set substantial financial goals for AIG and will continue to improve shareholder return by thoughtfully managing the trade-off between book value per share growth and improving ROE. By overhauling the way the company is organized and creating modular, self-sufficient businesses, we will drive substantial operating performance improvements and maximize value for shareholders.”