American International Group, Inc. ( AIG Quick Quote AIG - Free Report) has announced to sell a majority stake in its legacy specialist run-off company, Fortitude Group Holdings, LLC (Fortitude RE).
AIG will be selling a 76.6% stake for $1.8 billion to Carlyle Group and T&D United Capital Co. Ltd. Last November, AIG sold 19.9% of Fortitude Re to the Carlyle Group. The balance 3.5% ownership will remain with AIG as a minority stake.
By selling stake in Fortitude Group Holdings, AIG will let go of its legacy liability related to insurance portfolio, which includes run-off management solutions for long-dated, complex risk policies. These were non-core business for AIG with lower return and high risk characteristics.
Fortitude Re had reserves of nearly $31 billion against life and retirement policies and an additional $4 billion against general insurance/property/casualty policies. A reduction of legacy liability will also improve the company’s risk adjusted capital ratio.
AIG expects to use the majority of the proceeds to contribute capital to its insurance company subsidiaries upon closing, which is expected to take place in mid-2020.
This move is in line with management’s philosophy to make the company more agile and focus on core business. AIG is currently undergoing a broad-based operational turnaround in an effort to improve its returns. The company’s return on equity is 4.2% compared with industry’s ratio of 8.1%.
Recently, the company undertook a multiyear enterprise-wide program named AIG 200 to improve its core processes and infrastructure. It contains four core objectives, which are achieving underwriting excellence, modernizing operating infrastructure, enhancing user and customer experiences, and becoming a more unified company.
Year to date, the stock has gained 20% compared with its
industry’s growth of 9.6%. This increase is likely to have been driven by investors’ growing confidence in the company’s turnaround strategies.
We believe the company will be investing in more attractive growth opportunities such as accident and health. A&H is one of the company’s best performing businesses. Management believes A&H will be a strong engine of future growth because global demographic trends and demand for such products match up well with its product offerings and global footprint.
AIG carries a Zacks Rank #4 (Sell).
Some better-ranked stocks in the same space are Kemper Corp. (
KMPR Quick Quote KMPR - Free Report) , MGIC Investment Corp. ( MTG Quick Quote MTG - Free Report) and Radian Group Inc. ( RDN Quick Quote RDN - Free Report) . Each of these stocks carries a Zacks Rank #2 (Buy) and have surpassed estimates in each of the trailing four quarters, with an average positive surprise of 16.4%, 12.63% and 10.05%, respectively.
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