Buying The Bad
The mortgage guarantor contributed $464 million in pretax operating income in the first nine months of last year, or about 12 percent of the total from commercial insurance. The United Guaranty unit is probably worth $3.5 billion or less, according to estimates in the past week from analysts John Nadel of Piper Jaffray Cos. and Meyer Shields of Keefe, Bruyette & Woods. They cited the share plunges this year of publicly traded mortgage insurers like MGIC Investment Corp. and Radian Group Inc. That compares with AIG’s market value of more than $68 billion as of Monday’s close.
“I still don’t see the benefit of spinning part or all of UGC - it’s a profitable business, and the only purpose seems to be to fund the buyback,” Shields said in an e-mail Tuesday. “In other words, selling good businesses to buy more of the remaining bad businesses.”
Icahn’s View
Icahn sent his third letter to AIG last week, telling the board that management could lose credibility if Tuesday’s presentation fails to outline a drastic change. The activist first publicly voiced his separation plan in an October letter to Hancock, and sent another a month later saying he may solicit shareholders and seek a new director, who would agree in advance to take the CEO post if the board asks.
Hancock had also set new financial targets in February. He pledged to boost book value, increase return on equity and cut general operating costs by 3 percent to 5 percent annually through 2017. The CEO has since committed to eliminating hundreds of senior level positions. Still, operating ROE trails rivals at AIG and was 7.1 percent in the nine months through September.
“Amazingly, you have turned the quest for a 10 percent ROE into a half-decade journey,” Icahn said in October.
AIG said Tuesday that it is targeting a consolidated ROE of about 9 percent by next year, with at least 10.3 percent in the operating portfolio that Hancock sees as the core of the business. He also announced expense reductions of $1.6 billion within two years.
“AIG has taken another major step in simplifying our organization to be a leaner, more profitable insurer, while continuing to return capital to shareholders,” he said in the statement. “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 interest.”
Advisor Group
The AIG Advisor Group is being purchased by funds affiliated with Donald Marron’s Lightyear Capital and by PSP Investments, a pension fund manager in Canada, Hancock said in a separate statement that didn’t disclose terms.
Hancock previously said that the insurer benefits from its breadth of product offerings and global reach, and that a separation could squander at least a third of AIG’s tax assets, which were valued at about $15 billion in the third quarter of 2015.
The insurer accumulated tax assets in years when it was unprofitable, and they help limit future obligations to the government. Icahn said this month that the loss of tax assets won’t be as severe as Hancock said because they become less valuable over time, and it will take a while to complete transactions.
A separation could also be bad for bondholders, Hancock has said. Moody’s Investors Service has called Icahn’s initial plan “negative” for the company’s debt.
Financial Advisor magazine contributed to this article.