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AIG: To split or not to split? 1

AIG : TO SPLIT OR NOT TO SPLIT ?

By: Neha Nayak

New York University's Tandon School of Engineering

Author Note:

This was prepared for Marketing, MG-GY 6073, Fall 2015-Section 15253,

Under: Marketing Professor, James A. Cincotta.


Abstract:

Activist investor Carl Icahn had a proposal for American International Group's CEO, Peter

Hancock. He suggested to de - conglomerate their insurance company to three single line

businesses consisting of Life Insurance, Property & Casualty and Mortgage insurance. The

financial crisis showed us the iconic and near failure of AIG. Had it not been for the bailout from

the Federal Reserve, AIG would have met the fate of Lehman. It took AIG half a decade to

stabilize their share value which had taken a hit. The marketing implications of his proposal

indicate that his proposal is a wrong move. A separation at this point will turn AIG and its

divisions into rubble.

Introduction:

AIG, one of the biggest insurance companies, was considered 'too big to fail : way too important

for the economy', which is why the Federal Government chose to use their bazooka for the

bailout. What led to the near collapse of AIG is the large amount of credit default swaps that they

were dealing with (Kellogg Insight, 2015). The loan that the consumer had taken under mortgage

backed security had defaulted. Absence of stringent regulations majorly led AIG to accumulate

huge amounts of assets in the form of real estate. In due course of time the real estate was termed

as 'toxic' which was the major reason that led to the start of 'economic meltdown'.

Is AIG really 'too big to fail' or it is a misconception prevalent in places? Carl Icahn, a big time

investor of recent times is of the opinion that AIG would succumb under pressure sooner or later

if they don't separate into 3 divisions. As per Carl, splitting AIG into three companies namely

Property & Casualty, Life Insurance and Mortgage Insurance would be a major factor in raising

the share value of the stock. He claims that the share value would increase by a whopping 66%


from a mere 60 to 100 and also the returns to shareholders will improve significantly with this

change (Market Realist, 2015). Peter Hancock, who used to lead the Property & Casualty

division and now the CEO of AIG rebuffed the idea considering it to be a trivial factor and won't

in any way contribute to AIG's success.

Strategic de-composition of the split:

AIG's board of directors adopted a five - year strategic plan in 2014, from which it is clear that

the breakup of the company is not a part of AIG's strategic plan (Annual Report 2014, 2015).

Separation of the company at this point will go against the strategic plan proposed by the board

which in every sense will disrupt the functioning of the company. If the separation takes place

AIG will be operating in the three public companies. The three companies will have to start from

scratch in electing their CEO's, defining their strategic plan, reforming their marketing strategy

and aligning it to their goals and objectives.

Business unit inter-dependence:

The three divisions follow a different marketing strategy. Life Insurance at AIG is at a domestic

level and targets 30% of American households that are not at all into insurance and position

their product in the market by giving a slight push to their policies. This strategy helped

American General Life Insurance, a subsidiary of AIG, to generate 17% of sales under the

umbrella of Life Insurance (American General Life Insurance, 2015).

AIG's Property & Casualty target their product in the US which clearly benefits them since they

obtain half of its premium from US itself. Property & Casualty also has a global reach and an

international name which helps them garner one third of the premium from the Asia - Pacific


regions. Property & Casualty had failed to position their product in the year 2008. The increase

in property rates led to increase in the revenue for AIG in Property & Casualty from 7.6 billion

in 2008 to $10.5 billion in 2012 but the fluctuation of Japanese Yen against US dollars led to the

decline in the premium amount by 10% (Trefis, 2014). AIG failed to evaluate the external threats

in the form of changing rates before positioning their product.

It has been reported that the expected premium from Property and Casualty faced fluctuations

from 86% in 2010 to 67% in 2013 (Trefis, 2014). The international reach that Property &

Casualty division has exposed it to the risks that is difficult to predict because there might be

times when Property & Casualty loses heavily because of the natural calamities occurring in

different countries.

In situations like these AIG needs a stabilizer to diversify the risks. It comes in the form of AIG's

Life Insurance. If one product line fails it needs to be countered by another. Like in this scenario,

these two product lines provide a good mix and balance each other efficiently. So if the Property

& Casualty is separated from Life Insurance, AIG will have to suffer the consequences of the

separation as well.

Property & Casualty is the division operating worldwide and has investors across countries who

eventually would come across the products in the other division because of their investments in

Property and Casualty. If the company is to be split into different divisions, cross - selling of a

product to the clients will be difficult for the company (Market Realist, 2015).


Regulatory Issues:

Carl Icahn wants AIG to separate because he is primarily of the view that AIG is under

Systemically Important Financial Institution (SIFI) , meaning the Federal Government and the

Securities and Exchange Commission impose regulations on AIG since AIG is considered 'too

big to fail' by the government (Business Insider, 2015) . The failure of the company will affect

the economy greatly like what had happened during the financial crisis. The SIFI regulations on

AIG is due to its humongous size, which Icahn is of the opinion that won’t remain same once the

size of the company is reduced . What Federal Government did at that time was to protect AIG

from the toughest regulator, the market. SIFI cannot be considered as the prime motive for

separation (Reuters, 2015). Because even without SIFI designation AIG cannot get past other

regulators.

AIG's Life Insurance division has an edge over its competitors in the market because of its credit

ratings, its financial standing in the market and its distribution network. Moody's investor service

warns AIG that a loss of SIFI status would result to a negative credit rating for AIG, which

would badly affect the sale of Life Insurance (Property Casualty 360, 2015). Negative word of

mouth will dilute the brand equity of AIG's Life Insurance product which will further affect their

marketing strategy.

Revenue Generation:

Carl Icahn, who owns about 42 million shares is of the opinion that splitting the company would

increase the Return on Equity (ROE) which currently is 8%, lower than its competitors (The

Wall Street Journal, October 2015). But is separation the solution for it? Instead of de-

conglomerating the business Peter Hancock, the CEO, is open to the idea of selling off their


assets and going for share buybacks. AIG can do something similar to what Hartford Financial

Services had done. Liam Mcgee, their CEO decided to divest their assets. Hartford climbed to

$36.23 by the end of 2013 compared to the share value of $19.12 on 7th Feb 2012 (Insurance

Journal & Bloomberg, 2015). By selling some of their assets and by buying more shares AIG can

increase their share value in the market, which will eventually help them to raise their ROE.

AIG had pressed charges against Bank of America because of their shoddy business of selling

the defective mortgage backed security to recover from the meltdown. Bank of America put a

rest to all the litigation charges imposed by AIG by offering them a settlement of $650 million

(Reuters, 2014). So in the current scenario, the mortgage insurance is lucrative for AIG as long

as the housing bubble doesn't develop. Even though it is a high risk on return business, as long as

the economy stays stable and houses retain their value, AIG is going to generate revenue from

their mortgage insurance. The past of AIG's mortgage insurance makes it very evident why is it

important for AIG to stick to the multiline nature of their business. With an opening value of

1.85 on 16th of September, 2008 to 63.93 in current situation (Yahoo Finance, 2015). It took

AIG quite a few years to stabilize.


Fig 1. (Yahoo Finance, 2015)

Fig 2. (Yahoo Finance, 2015)


A separation at this stage will tarnish its reputation, which took them years of struggle.

TOWS analysis of AIG's separation:

TOWS analysis instead of SWOT analysis, since it is necessary to determine external Threats

and Opportunities before examining internal Weaknesses and strengths.

External Threats:

After separation, AIG's mortgage and Life insurance will face enormous pressure from their

competitors.

Due to separation it will be difficult for AIG to mitigate risks within different divisions.

No scope to cross-sell the products.

Opportunities:

Growth exposure for each division.

Internal Weakness:

They will lose on market which refers to their points of differentiation of obtaining insurance

services under one roof.

Will have to reform their marketing strategies all over again.

Lose out on cross trained employees,


Strengths:

Easy administrative functionality.

The TOWS analysis of separation indicates that AIG would benefit if they stick together as a

single unit instead of de-conglomerating their multiline nature of business as the

Threats/weaknesses due to separation overpowers the opportunity that arises from it.

Conclusion:

If AIG separates its business into three separate divisions, the wrath of the economy will affect

Life Insurance, Mortgage and Property & Casualty since they rely on each other to an extent.

The probability that the division will fail stands a higher chance than its potential progress. AIG

should maintain their position by not falling a prey to the separation strategy as it could possibly

be out of vested interest of its proponents. The multiline nature of AIG's business had helped it

to recover from the losses after financial crisis. Once it separates its company there is no coming

back from it. So it's crucial for them to strategically think on it and take an informed decision.


Reference:

1. American International Group. (2015, February 20). Annual report 2014. Retrieved from

http://www-111.aig.com/AIG_Internet/AIG_2014_Annual_Report.pdf

2. Reuters. (2014, July 16). BofA pays AIG $650 million to settle mortgage disputes|

Reuters. Retrieved from http://www.reuters.com/article/us-bankofamerica-mbs-

settlement-idUSKBN0FL1B720140716

3. Property Casualty 360. (2015, November 3). Moody’s warns of 'negative' impact in

proposed AIG breakup | PropertyCasualty360. Retrieved from

http://www.propertycasualty360.com/2015/11/03/moodys-warns-of-negative-impact-in-

proposed-aig-br

4. American General Life Insurance, M. (2015). American General Life Insurance

Company|Company Profile|Vault.com. Retrieved from http://www.vault.com/company-

profiles/insurance/american-general-life-insurance-company/company-overview.aspx

5. Trefis Team. (2014, April 30). A Look At AIG's Property And Casualty Business --

Trefis. Retrieved from http://www.trefis.com/stock/aig/articles/237266/aigs-property-

and-casualty-%20business/2014-04-30#footnote_0_237266

6. Market Realist. (2015, November 2). AIG's Proposed Split: Assessing Management

Perspective - Market Realist. Retrieved from http://marketrealist.com/2015/11/aigs-

proposed-split-assessing-management-perspective/

7. Insurance Journal, & Bloomberg. (2015, November 18). If AIG Won't Split, Then It

Should Sell Pieces: Investor Paulson. Retrieved from

http://www.insurancejournal.com/news/national/2015/11/18/389302.htm


8. Business Insider. (2015, November 25). DEUTSCHE: Carl Icahn wrong about AIG -

Business Insider. Retrieved from http://www.businessinsider.com/deutsche-carl-icahn-

wrong-about-aig-2015-11

9. Yahoo Finance. (2015, December 11). AIG Historical Prices | American International

Group, I Stock - Yahoo! Finance. Retrieved from

http://finance.yahoo.com/q/hp?s=AIG+Historical+Prices

10. The Wall Street Journal. (2015, October 29). AIG Mortgage Spinoff, Sale on the Table -

WSJ. Retrieved from http://www.wsj.com/articles/aig-mortgage-spinoff-on-the-table-

1446156211

11. Kellogg Insight. (2015, August 3). AIG's financial crisis: What really went wrong?

Retrieved from http://insight.kellogg.northwestern.edu/article/what-went-wrong-at-aig

12. Reuters. (2015, October 28). Icahn takes stake in AIG, calls for breakup| Reuters.

Retrieved from http://www.reuters.com/article/us-icahn-aig-

idUSKCN0SM1O920151028

13. Kotler, P., & Keller, K. L. (2012). Marketing management (14th ed.).

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