American International Group is cutting itself down to size. The $27 billion insurer that nearly brought down the global financial system on Monday said it will spin off its life and retirement arm, which represents about a third of 2019 adjusted revenue. Unloading businesses weighed down by ultra-low interest rates should please shareholders and make a firm synonymous with trouble easier for buyers to swallow.
The insurer, which announced the plans at the same time as it named President Peter Zaffino as its new chief executive, has needed to make a change. The New York company has seen its share price drop 38% this year, more than twice as much as the S&P 500 Insurance Index. And activist investor Carl Icahn pushed it to break up into three companies in 2015, claiming it was “too big to succeed.”
AIG’s board was gun-shy at the time. Shedding the steady income stream from the consumer insurance businesses may have made less sense when the general insurance arm was still struggling. Icahn sold his stake in 2018. But Zaffino – who is replacing Brian Duperreault as CEO – clearly took the hint.
The timing is likely also influenced by the Federal Reserve’s current plans to keep interest rates near zero for years. Life insurers traditionally match their long-term liabilities mostly with steady income from enormous bond portfolios. Lower rates in traditional investments squeeze profitability.
And there are new buyers for these assets. Private equity shops like Apollo Global Management and Blackstone have been in the market, as they benefit from the permanent capital and can use more complex investments to generate higher returns. Prudential, the $36 billion UK-based firm, in June sold an 11% stake in Jackson, its U.S. life business, to the Apollo-backed Athene.
The split may take time, but its completion should also make the rump AIG a more attractive acquisition target. The company has made significant strides since its $182-billion government bailout in 2008, like restoring underwriting profitability in the general insurance business. But global actuarial powerhouses like Allianz, Zurich Insurance and Axa likely wouldn’t have been eager to buy the bulkier firm. Without that dead weight, AIG may be far more digestible.
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