AIG American International Group Inc

By Leslie Scism and David Benoit 

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

In a strategy update that comes as billionaire investors Carl Icahn and John Paulson push for a three-way split to improve the insurer's flagging financial results, Chief Executive Peter Hancock said AIG would reorganize its core property-casualty and life-insurance businesses 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.

"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 reorganization and comments surprised some analysts who had anticipated a plan that would be largely limited to a series of relatively 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 wasn't immediately available for comment, and a spokeswoman for Mr. Paulson declined to comment.

"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.

Mr. Icahn, who last year called AIG "too big to succeed," in November disclosed a stake of more than 42 million AIG shares, translating to $2.61 billion and roughly 3% of the company. Mr. Paulson's Paulson & Co., bought its AIG stake last year, according to regulatory filings. It held 14.6 million shares, or just over 1% of AIG shares, as of its most recent filing.

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, sell a financial-advisory business and more aggressively reduce expenses. It also committed to returning to investors at least $25 billion over the next two years through share buybacks and dividends.

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.

Some analysts said the company's move to create the nine businesses is smart in that it allows AIG to use most, if not all, of its tax-deferred 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.

AIG's plan "sets the stage for a broader-based spinoffs or restructuring down the road, once the value of the deferred tax assets are realized," said Cathy Seifert, an equity analyst with S&P Capital IQ. AIG's plan "buys time...it won't have to do fire sales."

AIG also said it would strengthen its loss reserve in its property-casualty business by $3.6 billion before taxes, representing about 6% of AIG's total property-casualty net reserves.

The insurer said it would eliminate $1.4 billion of net general operating expenses over the next two years, compared with a prior three-year target of $1 billion to $1.5 billion. In addition to staff reductions, the company said it would continue to move operations to lower-labor-cost locations, outsource and increase automation, among other actions.

If a breakup were to occur, it would be another remarkable turn of events from the company's heights in the 1990s, when then-CEO Maurice R. "Hank" Greenberg transformed what was then a midsize property-casualty insurer into a globe-straddling behemoth. At its peak, AIG had far-flung operations and, in addition to selling insurance, it leased airplanes and offered financial derivatives to big banks.

But the capital-markets crisis of 2008 caused a liquidity problem so severe that AIG came close to filing for bankruptcy protection. To repay its nearly $185 billion U.S. government bailout, AIG sold more than 50 businesses and assets.

Write to Leslie Scism at leslie.scism@wsj.com and David Benoit at david.benoit@wsj.com

(END) Dow Jones Newswires

January 26, 2016 16:32 ET (21:32 GMT)

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