(FROM THE WALL STREET JOURNAL 1/27/16) 
   By Leslie Scism and David Benoit 

American International Group Inc. executives laid out plans that could significantly slim down the insurer over time but stopped well short of giving activist investors the immediate breakup they want.

In a strategy update Tuesday, Chief Executive Peter Hancock said AIG would reorganize its core property-casualty and life-insurance operations into nine units. AIG said those units would be "more nimble, stand-alone" businesses that can either expand within AIG or be spun off or sold over time, depending on their performance and potential offers.

The move comes as billionaire investors Carl Icahn and John Paulson have pushed for a three-way split to improve the insurer's flagging financial results, as well as avoid being labeled a systemically important financial institution, or SIFI, by regulators, which carries heightened scrutiny and requirements to hold robust capital buffers against losses. AIG is one of four nonbank financial firms to be labeled systemically important.

"There are no sacred cows," Mr. Hancock said Tuesday. "We look at all our businesses through the lens of, would they create more value if they were in the hands of somebody other than ourselves?"

The breadth of the reorganization and comments surprised some analysts who had anticipated moderate cost-cutting moves and small divestitures. Still, some analysts predicted Mr. Icahn would proceed with a proxy battle to replace management and increase pressure on AIG's board.

Mr. Icahn in an interview reiterated his call for more change at AIG. "Most large shareholders understand that a simple truth is this company . . . should be split and you should get somebody that understands the [property-and-casualty] business to run that," he said.

A spokeswoman for Mr. Paulson's Paulson & Co. hedge fund declined to comment.

Pushes to break up companies are common from activist investors against firms of all stripes, and while they have found success in some sectors such as industrial conglomerates, activists have had a harder time splitting up financial institutions.

Mr. Icahn, who last year called AIG "too big to succeed," in November disclosed a stake of $2.61 billion, or roughly 3% of the company. Paulson & Co. bought its AIG stake last year, according to regulatory filings. It held just over 1% of AIG shares, as of its most recent filing.

"It may not be enough to satisfy shareholders but it is an incremental and positive move by the company," said Josh Stirling, a stock analyst with Sanford C. Bernstein.

AIG announced several other steps Tuesday that it said would lead to a "leaner, more profitable and focused" company.

The insurer said it would conduct an initial public offering of its mortgage-insurance unit and sell a financial-advisory business. It raised its cost-cutting target to $1.6 billion within two years, including through staff reductions and moving operations to lower-cost locations.

It also committed to returning to investors at least $25 billion over the next two years through share buybacks and dividends. In addition, it increased reserves by $3.6 billion before taxes.

Some of those moves had been anticipated by analysts, though the capital-return figure was higher than even Mr. Icahn's call for $20 billion that people familiar with the matter had said Mr. Icahn saw as possible.

On Tuesday, AIG's shares rose 1%, to $55.91.

Mr. Icahn said in an open letter to AIG's board last week that he wouldn't be satisfied with "small-scale asset sales and incremental cost-cutting."

Douglas Steenland, AIG's nonexecutive chairman, said "being a nonbank SIFI is not currently a binding constraint on return of capital."

Some analysts said the company's move to create the nine businesses is smart in that it allows AIG to better use its deferred tax assets. During the financial crisis, AIG posted huge quarterly losses, and tax law allows companies to use those losses to offset future gains. AIG has said it would forgo billions of dollars of tax benefits in an immediate three-way split.

Analysts also said stocks and interest rates have fallen since Mr. Icahn launched his campaign in late October, putting valuations of life insurers near postcrisis lows. Insurers generate a substantial portion of their earnings from interest income on big bond portfolios, making it an inopportune time for AIG to be pursuing divestitures, some analysts said.

Mr. Hancock wrote in a memo to employees Tuesday that AIG's latest plans have been in the works since he became CEO in September 2014.

Asked in an interview Tuesday whether the reorganization plan sets the stage for a breakup in the next couple of years, Mr. Hancock said: "The simple answer is no."

He added that the creation of nine units would provide flexibility "to reshape the company. We recognize we can make this company more valuable through divestitures of certain pieces. . . . I don't see the possibility of a breakup."

 

(END) Dow Jones Newswires

January 27, 2016 02:48 ET (07:48 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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