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American International Group to Divest Mortgage Business

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American International Group Inc. (AIG - Free Report) announced that it will divest its mortgage insurance unit United Guaranty Corporation to Arch Capital Group Ltd. (ACGL - Free Report) for $3.4 billion. The divestiture is aimed at turning AIG into a leaner and more-focused company.

American International’s CEO Peter Hancock came under pressure last year from billionaire investor Carl Icahn to slice the company into three different units to ease its operations. The latest divestiture should serve that purpose. 

Back in Nov 2015, in a letter addressed to Peter Hancock, Carl Icahn asked for a split in the mammoth company into three parts – property and casualty, life and mortgage insurance. According to Icahn, American International runs such diverse businesses that its business lines have little strategic fit between them and their segregation may unlock much greater value. He pointed out that American International’s behemoth size and diverse businesses have become a hindrance in its own path toward progress. The investor pointed out that the company is generating sub-par returns.
 
He also pointed out that American International is “too big to succeed” and that it considerably lags its peers in terms of generating returns for its shareholders. Constraints such as size and capital are the primary culprits. The company faces stringent capital restriction that hampers its competitiveness. He also held American International’s inadequate expense management responsible for its downfall.

Having underperformed from a long time, Icahn was unwilling to wait any further for slow reforms from the company. He, in fact, wanted the company to take steps which would speed up the process of unlocking massive value tied within this great company. And the best course of action would be to cut it into three parts.
    
Hancock, however, was not convinced with the idea of a split-up as he did not see much financial sense in it. To work a way out, the American International  chief had instead promised to take steps that would lead to higher returns.

Some of the recent moves made in this regard:

In order to drive up the returns from American International, a new share buyback plan was announced in Feb 2016 authorizing an additional $5 billion in share repurchases.

American International also raised its quarterly dividend by 14%. These moves were part of the commitment it announced at the start of the year to return $25 billion to shareholders over two years.

American International also formed a new Executive Leadership Team structure, comprising 10 heads – all veterans in their respective fields – to work toward attaining the strategic priorities of the company. The company also slashed several jobs, including those at senior positions in the company in order save cost.

American International was also considering selling off blocks of life insurance policies, in order to focus on more profitable avenues of growth.  

But it seems that the above steps would take much longer than warranted to generate required returns. As such, amid mounting pressure to perform, the CEO had to resort to splitting its mortgage insurance unit.

The company has finally given up to Icahn’s demands by separating its mortgage insurance unit, we might soon see the separation of its two other units.

American International carries a Zacks Rank # 3 (Hold). Some better-ranked stocks from the insurance space are James River Group Holdings, Ltd. (JRVR - Free Report) and Swiss Re Ltd.  (SSREY - Free Report) . Both these stocks carry hold a Zacks Rank # 2 (Buy).

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