Maag takes over AIG Asia Pacific as battle with Icahn hots up

Jose Hernandez, president and CEO, AIG Asia Pacific, will leave the company along with five other senior executives as CEO Peter Hancock cuts his executive management team down from 15 to 10. Mr Hancock takes these and other measures in Asia Pacific and worldwide to improve profitability in the face of increasingly intense pressure from activist investor Carl Icahn. Mr Icahn is trying to convince other investors that AIG needs to be broken up and simplified. The insurer’s embattled leadership has partly responded to the investor’s demands.hideAfter the leadership changes were revealed, AIG further announced plans on 26 January to return at least $25bn of capital to shareholders during the next two years, execute an initial public offering (IPO) of up to 19.9% of United Guaranty Corporation (UGC) and undertake other sales, such as AIG Advisor Group. It has also committed to a cost cutting-programme designed to realise $1.6bn in two years and a plan to reduce its commercial P&C accident year loss ratio by six points by 2017. The insurer also revealed further significant loss reserve increases, a continuing trend during the past couple of years that risk managers may find more worrying than the ongoing battle with Mr Icahn when the dust settles. It said that its fourth quarter non-life loss reserve analysis had revealed the need to strengthen reserves by $3.6bn pre-tax in the fourth quarter of 2015. Accident years 2004 and prior represent $1.3bn. The remaining $2.3bn results in an increase of slightly less than 0.7 points on average for the 2005 through 2014 accident year loss ratios, explained AIG. All this action at AIG appears to have occurred because Mr Icahn has ramped up the pressure during the past couple of months, looking to break AIG up into three separate entities to avoid being classified as a Systemically Important Financial Institution (SIFI). In his latest public letter, published on 19 January, the investor said that AIG management has been either “purposefully misleading” in its public disclosures or is “negligently uninformed” about the feasibility of his de-conglomeration plan. “In conversations with man-agement, I learned that disclo-sures provided on the third quarter earnings call regarding obstacles to de-conglomerating AIG were in some cases materially inaccurate,” wrote Mr Icahn. The investor called on AIG non-executive chairman Douglas Steenland to force president and CEO Peter Hancock to finally admit that breaking the group up is the best plan and get on with it. Mr Steenland, however, used the strategic update to support Mr Hancock’s latest batch of changes and the decision to further streamline and reorganise the group into nine new business units and a new legacy operation. He also stressed that that he does not agree with Mr Icahn’s proposal for a full breakup of the group because it does not offer all stakeholders best value. “After careful consideration, AIG believes that a full breakup in the near term would detract from, not enhance, shareholder value,” said Mr Steenland. “A lack of diversification benefits would reduce capital available for distribution, and there would be a loss of tax benefits. Being a non-bank SIFI is not currently a binding constraint on return of capital,” he added. AIG said the latest series of strategic actions, organisational changes, and “operating improvements” would create a “leaner, more profitable and focused insurer”. The return of $25bn of capital to shareholders during the next two years would be carried out via buybacks and dividends. The capital return will be made possible by a combination of improved operating performance, divestitures, reinsurance transactions, a shift in asset allocation, a “modest” increase in leverage and the release of capital over time from low-earning legacy assets, said AIG. The insurer added that the approval of the IPO by the board of up to 19.9% of UGC would be a first step towards a full separation. The board also approved the sale of AIG Advisor Group to Lightyear Capital, a New York private equity firm focused on financial services, and PSP Investments, one of Canada’s largest pension investment managers. The transaction is expected to close in the second quarter of 2016. The AIG board also approved a number of organisational changes that could lead to future sell-offs of more businesses. This includes the creation of nine “modular” business units that the insurer says will have greater “end-to-end accountability” and each with its own specific financial metrics. The new units comprise liability and financial lines, property and special risks, US commercial and Europe commercial, within the commercial segment. Inside the consumer segment, the modular units will be US Individual Retirement, US Group Retirement, Life, Health and Disability, Personal Insurance (P&C) and Japan. Significantly, AIG said the new structure will enable it to more effectively decide which businesses to keep and which to potentially offload, a decision that Mr Icahn should find positive. AIG said the new structure will decentralise decision-making, provide more accountability to business leaders and allow for migration to a more “variable” cost structure. “The reorganisation will give AIG options to retain and grow the businesses, or take public or sell the units if they don’t adequately contribute to financial targets, or if it becomes apparent that they are worth more outside of AIG than within, or if they represent an efficient means of returning capital to shareholders,” stated the company. “The company could consider the separation of even the larger modular units of its commercial and consumer segments over time with utilisation of the DTA, contingent on improvements in the credit risk profile and operating performance,” added the group. The company will also create a new legacy portfolio to hold non-strategic assets. Charlie Shamieh has been appointed legacy CEO. This portfolio will comprise “non-strategic” assets and businesses that it intends to exit or run off. AIG said the portfolio will be managed in a way to monetise assets in a “timely” manner to return capital to shareholders. The company said that it will also introduce new disclosures later in 2016 to clarify sources of financial returns and “enhance focus” on a goal of releasing $9bn of capital by 2017. The targeted expense reduction of $1.6bn within two years represents 14% of 2015 gross general operating expenses. As well as improving the commercial P&C accident year loss ratio by six percentage points, AIG also has a consolidated return on equity target of 9% by 2017. “With these actions, AIG has taken another major step in simplifying our organisation to be a leaner, more profitable insurer, while continuing to return capital to shareholders and improve shareholder returns,” said Mr Hancock. “The creation of more nimble, standalone business units that can grow within AIG or be spun out or sold allows us to do what is in our shareholders’ best interests,” he added.

Maag takes over AIG Asia Pacific as battle with Icahn hots up

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