American International Mulling Over Lloyds Insurance Sale

Sources have reported that American International Group Inc. (NYSE:AIG) is contemplating the sale of its insurance operations related to Lloyd's of London to The Canada Pension Plan Investment Board, the largest pension fund of Canada. We believe the divestiture is aimed at turning AIG into a leaner and more-focused company as urged by investors Carl Icahn and John Paulson.

In Nov 2015, in a letter addressed to Peter Hancock, Carl Icahn had asked for a split of the mammoth company into three parts – property and casualty, life and mortgage insurance. According to Icahn, American International’s diverse businesses have little strategic fit between them and may unlock greater value if they are segregated. He pointed out that the company’s behemoth size has become a hindrance in its own path toward progress. The investor also pointed out that this “too big to succeed” company is lagging its peers with sub-par returns.

Constraints such as size and capital are its primary culprits. The company faces stringent capital restriction that hampers its competitiveness. Icahn also held American International’s inadequate expense management responsible for its downfall.

Having digested American International’s underperformance for long, Icahn was unwilling to wait any further for slow reforms from the company. He, in fact, wanted American International to take aggressive steps to expedite the process of unlocking massive value tied within it. And the best course of action would be to cut it into three parts.

Hancock, however, was not convinced with the idea of a split-up as he did not see much financial sense in it. To work a way out, the American International's chief had instead promised to take steps that would lead to higher returns.

AMER INTL GRP Price

Some of the recent moves made in this regard:

Last week, the company took one of the biggest strategic restructuring measures by announcing the sale of its mortgage insurance unit United Guaranty Corporation to Arch Capital Group Ltd. (NASDAQ:ACGL) for $3.4 billion. This move is in sync with Icahn’s suggestion to speed up reforms at the company.

The other steps taken recently by American International to drive up returns include the announcement of a new share buyback plan earlier this month. The company authorized the repurchase of additional shares with an aggregate purchase price of up to $3.0 billion. In Feb 2016, it had authorized an additional $5 billion in share repurchases. The company also raised its quarterly dividend by 14%.

Moreover, the company formed a new Executive Leadership Team structure, comprising 10 heads – all veterans in their respective fields – to work toward attaining its strategic priorities. The company also slashed several jobs, including senior positions in order save cost.

In May, the company completed the sale of Advisor Group to investment funds affiliated with Lightyear Capital LLC.

These moves were part of the commitment it announced at the start of the year to return $25 billion to shareholders over two years.

The recent developments at American International show that it is vigorously considering asset disposals since it has been warned to buck up its speed to show performance.

American International carries a Zacks Rank #3 (Hold). Some better-ranked stocks from the insurance space are James River Group Holdings, Ltd. (NASDAQ:JRVR) and Swiss Re Ltd. (OTC:SSREY) . Both these stocks carry hold a Zacks Rank # 2 (Buy).