A.M. Best has placed under review with negative implications the issuer credit rating (ICR) of American International Group, Inc. and the financial strength ratings (FSR) and ICRs of its insurance subsidiaries.
“The under review status reflects the strengthening of loss reserves in AIG’s non-life business by US$3.6 billion during the fourth quarter of 2015, primarily reflecting adverse development on prior accident years in longer-tailed lines of business,” the rating agency noted in a statement Wednesday.
Approximately 41% of the strengthening relates to 2011-2013 accident years – for which either favourable or modestly adverse development had been previously reported – and the 2014 accident year, A.M. Best points out. “The total amount of the deficiency reported exceeds A.M. Best’s assumptions of loss reserve deficiency, excluding the reversal of statutory discounts of reserves for workers’ compensation.”
A.M. Best further notes that the under review status also considers the potential impact on the business profile and future earnings capacity of AIG of the strategic actions being taken by management to improve profitability and efficiency and maximize shareholder value.
On Tuesday, AIG announced a series of strategic actions the company plans to take to become a leaner, more profitable and focused insurer. AIG’s Board of Directors has committed to, among other things, the following actions:
- Return at least US$25 billion of capital to shareholders over the next two years via buybacks and dividends without compromising the utilization of the company’s deferred tax assets. The capital return is expected to be sourced from 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.
- Execute an initial public offering of as much as 19.9% of the outstanding shares of United Guaranty Corporation as a first step towards a full separation. The IPO will be pursued in mid-2016.
- Streamline the business through divestitures and exits, including the sale of the AIG Advisor Group. The insurer has announced the sale of AIG Advisor Group and PSP Investments, one of Canada’s largest pension investment managers, with the transaction expected to close in the second quarter of 2016.
- Create nine “modular” business units within its Commercial (Liability and Financial Lines, Property and Special Risks, U.S. Commercial, and Europe Commercial) and Consumer (U.S. Individual Retirement, U.S. Group Retirement, Life, Health and Disability, Personal Insurance and Japan) segments, with greater end-to-end accountability and each having its own specific financial metrics. The structure will decentralize decision-making, provide more accountability to business leaders, and allow for migration to a more variable cost structure. It also offers AIG options to retain and grow the businesses, or take public or sell units.
- Reduce US$1.6 billion in expenses within two years, representing 14% of the 2015 gross general operating expenses. Savings will be driven by an acceleration of AIG’s current initiatives to rationalize the company’s global structure, including consolidation of activities and de-layering, increased utilization of shared services and outsourcing, continued movement of operations to lower-cost locations, and further increased automation.
- Improve Commercial p&c accident year loss ratio by six points by 2017. Aggressive actions will be taken by addressing unprofitable clients purchasing one or two products, expanding and optimizing the use of reinsurance, and exiting or remediating targeted segments of underperforming portfolios. As well, actions will be undertaken to sharpen the company’s consumer focus and improve profitability, including narrowing its footprint in Personal Insurance, expanding reinsurance utilization for inefficient segments of the U.S. life business, achieving maximum benefits from investments in Japan, and growing the U.S. Retirement business.
- Target approximately 9% consolidated ROE (return on equity) by 2017, reflecting 10.3% to 10.7% in the operating portfolio. The increase will be driven by the operating improvements, capital actions and profitable growth outlined in the strategic plan. At the same time, legacy assets and liabilities will release low-earning capital over time
“With these actions, AIG has taken another major step in simplifying our organization to be a leaner, more profitable insurer, while continuing to return capital to shareholders and improve shareholder returns,” president and CEO Peter Hancock (pictured left) says in a statement. “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,” Hancock continues.
“After careful consideration, AIG believes that a full breakup in the near term would detract from, not enhance, shareholder value. A lack of diversification benefits would reduce capital available for distribution, and there would be a loss of tax benefits, notes Douglas Steenland (pictured below), AIG’s non-executive chairman.
“By overhauling the way the company is organized and creating modular, self-sufficient businesses, we will drive substantial operating performance improvements and maximize value for shareholders,” Hancock adds.
Hancock offers more views on AIG’s announcement and plans during a video interview at http://www.aig.com/strategy-update.
A.M. Best’s ratings review will continue while the rating agency reviews AIG’s planned actions in greater detail with management, receives and reviews year-end financial information for AIG and its rated subsidiaries and assesses the potential impact of these items on the current ratings.