29 Mar

Could Icahn and Citi Be Suggesting an AIG Sale?

WRITTEN BY Robert Karr FEATURED IN Macroeconomic Analysis

Restructuring

American International Group (AIG) has announced that it will spend $500 million on restructuring initiatives for organizational simplification, operational efficiency, and business rationalization. The company’s fourth quarter results included $222 million in pre-tax restructuring, of which $123 million related to previously announced actions. The initiatives also aim to present a strong alternative to Carl Icahn’s proposal to split AIG into three businesses to generate higher shareholder value.

Could Icahn and Citi Be Suggesting an AIG Sale?

The initiatives are expected to generate annualized savings of approximately $400 million–$500 million when fully implemented. Of the total savings, $300 million will be in employee severance and one-time termination benefits, concentrated mainly on senior levels of management.

The company is expected to save another $100 million in costs associated with the modernization of its information technology platforms. The balance savings will be related to costs associated with the consolidation of legal entities and exiting business with lower returns.

Speculation of sale

As AIG continues to decline, there are suggestions as well as speculation of an AIG sale. Citi is advising that Google (GOOGL) should buy the company and convert it into a fintech (financial technology) insurance giant. These speculations, although they seem unlikely to happen, can push AIG’s stock prices.

AIG announced the sale of AIG Advisor Group in January 2016. It’s expected to close in 2Q16. The company has announced an IPO (initial public offering) of up to 19.9% of United Guaranty, subject to regulatory approvals, as a first step toward a full separation. It also announced an agreement to sell operations in four Central American countries during the fourth quarter. In 4Q15, AIG monetized $2.1 billion of legacy assets, including 184 million ordinary H shares of PICC Property & Casualty Company Limited in order to boost its capital position.

AIG also grew its book value per share by ~13% during the past year. In comparison, book value growth per share was ~6% for ACE (ACE) and Allstate (ALL) and ~8% for Chubb (CB) in the past year.

Insurance players (XLF) with stakes in mortgage-backed derivatives faced huge losses after the 2007 crisis, resulting in higher risks of bankruptcy. Following the financial crisis, the US government gave AIG $182 billion in bailout aid, as the company suffered huge losses on mortgage-related derivatives bets.

In the final part of our series, we’ll see what could drive AIG stock in 2016.

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