Don’t break up AIG: CEO

Last week, AIG announced aggressive actions to create a leaner, more profitable and focused insurer. Some have called for a three-way break-up of our business, stating there is no reason that AIG's Life and Property & Casualty (P&C) operations should stay together.

There is no doubt that our industry is undergoing significant change. Insurance companies of tomorrow will look very different from today. However, a split-up of AIG in the near-term is not the right path. It would hurt our shareholders as well as our other stakeholders: our customers, regulators and employees.

Material amounts of value would be at risk as we would sacrifice the benefits of our valuable deferred tax assets, diversification benefits, diverse earnings streams and scale efficiencies including shared services. Over the next two years, our plan will return at least $25 billion of capital to our shareholders.

AIG CEO Peter Hancock
Source: AIG
AIG CEO Peter Hancock

Size is not an end in itself. Since 2008, we have sold more than 50 businesses and other assets. We have eliminated approximately 300 of our top 1,400 positions. We will pursue an IPO of our mortgage insurer, United Guaranty. We are selling our broker-dealer network, the Advisor Group.

We're making tough calls. Over the next two years, we will reduce firm-wide operating expenses by an additional $1.6 billion, which represents 14 percent of 2015 general operating expenses. We are reorganizing our business segments into nine "modules" that each have end-to-end responsibility and accountability, and provide strategic flexibility in the future. Future divestitures are possible as we assess which assets are the most sustainable.

Maintaining Diversification While We Simplify AIG

Insurance is by definition about aggregating and mutualizing risk. AIG benefits from diversification, and the loss of these benefits would likely impose additional capital constraints, affecting the company's ability to return capital to shareholders. We currently operate under several external capital regimes, including state and sovereign regulators, rating agencies and regulations for non-bank Systemically Important Financial Institutions (SIFIs). Our ability to return capital is governed, among other factors, by two constraints - credit ratings and regulatory thresholds. Under both constraints, our benefits are only available if AIG remains a multi-line insurer.

Diversification benefits include:

  • S&P's consolidated capital model, which estimates a $5 billion to $10 billion reduction in required capital for AIG as a whole, compared to the sum of standalone capital across AIG's Life and P&C entities.
  • Moody's / A.M. Best explicitly make references to the value of diversification in determining overall credit ratings.
  • Under the emerging Insurance Capital Standard, the results of the International Association of Insurance Supervisors mandated "field test" indicate that AIG would require substantially less capital as a whole vs. the sum of standalone Life and P&C entities individually.

Deferred Tax Asset (DTA) Benefits

AIG garners significant benefits from its DTAs, which are an important source of liquidity and support capital management. AIG is actively pursuing strategies to utilize its tax attributes before

they expire. A near-term separation would impede our ability to take advantage of these benefits prior to their expiration and, in turn, impact our ability to return capital to shareholders.

AIG's Regulatory Environment

Finally, there is a myth that AIG's designation as a non-bank SIFI puts us at a competitive disadvantage. To date, our compliance and preparation for SIFI regulations has not materially affected our expense structure, capital plans or management focus. In addition to the Federal Reserve, AIG is regulated by the insurance departments of 50 U.S. states and the District of Columbia, and by the insurance and financial conduct regulators in over 80 non-U.S. jurisdictions.

Regulators haven't yet set capital requirements for non-bank SIFIs or large, international insurers. It would be imprudent to make fundamental structural changes until the rules and regulations are evaluated. AIG will be able to review and comment on those rules when issued and will make a further assessment at that time.

We're focusing on our business so we can improve profitability and shareholder return, and both the Board and the management team are fully aligned around our strategy.

Commentary by Peter Hancock, CEO of AIG. Mr. Hancock was named president and Chief Executive Officer of AIG in September 2014, when he was also elected to the AIG Board of Directors. Previously, he served as CEO of AIG Property Casualty. He joined AIG in 2010 as Executive Vice President, Finance, Risk, and Investments. He joined AIG from KeyCorp, where he was vice chairman, responsible for Key National Banking.

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