Banking & Finance

AIG's Path to Life and Retirement Separation Could Be Long and Painful

Many investors use an alternative valuation approach in their investments. Rather than looking at a book value in financial stocks, an alternative measurement that is using a “sum of the parts” valuation. In short, some companies are worth more if you break their lines of business up as standalone companies rather than keeping them all together.

American International Group Inc. (NYSE: AIG) is one of the largest insurers in the world. It has so many different operations that most people in the company might have a hard time telling you every single line of financial services that the company is in. AIG has not announced a formal break-up of the entire company into its parts, but the financial services giant did announced that it plans to separate the Life & Retirement business from the AIG parent.

This move may have a simple plan after the dust settles, but this could be a very long, costly and painful exercise. There is also a chance that the plan is simply blocked. It is very important to look backward and forward in time to determine what exactly this means for AIG shareholders, and it may be much more drastic than the share price reaction indicated at first.

While many pieces of news like this would be received with a cheer, AIG also announced some top leadership changes to reflect the move and the company issued a new update on catastrophe losses. Those losses include its COVID-19 catastrophe-related losses and included the company’s Life & Retirement and Legacy annual actuarial assumptions.

AIG’s new assumptions show a $9 million pre-tax charge against net income, including a $120 million pre-tax charge and a $98 million pre-tax benefit.

As for the separation of AIG’s Life & Retirement business, the company’s executive management review of operations now indicates that a simplified corporate structure will unlock significant value for shareholders. AIG was clear that no specific path to how it will separate the operation has been made. The company only specified that the intent will be to maximize shareholder value and establishes two independent and market leading companies.

AIG has already been in the decade-plus long process of de-risking the balance sheet and to seek profitable growth. The company has already exited some operations outright over time, it has boosted its General Insurance operations, and diversified its Life & Retirement operations. Whether or not the separation of the Life & Retirement unit from AIG will boost the company’s valuation or not remains to be seen. Earlier this year, AIG announced the sale of Fortitude Group Holdings for a $2.2 billion sale price to further de-risks its balance sheet and to sharpens its focus on core businesses.

AIG’s first quarter of 2020 showed that the Life and Retirement unit reported adjusted pre-tax income of $574 million. This was lower because of declines in equity markets and widening spreads in credit markets, which the company specified was as a result of the ongoing COVID-19 crisis.

AIG’s second quarter results of 2020 indicated that the Life and Retirement unit had a pre-tax income (APTI) of $881 million, which was a decrease of $168 million compared to the prior year’s same quarter. That drop was said to be driven by private equity losses, continued spread compression, as well as elevated mortality related to COVID-19. The company’s adjusted return on attributed common equity for the second quarter was 13.2% in Life and Retirement.