The contrasting market outlook for P&C insurance compared with life insurance began to overshadow the benefits that American International Group Inc. enjoyed as a global player in both sectors, according to industry analysts.
The insurance behemoth announced Oct. 26 that it will separate its life and retirement business and increase its focus on P&C. Investors and observers had been suggesting the restructuring for years, but the company had resisted until now.
The ongoing low interest rate environment continues to cloud the future returns for life insurance companies. But in the P&C sector, social inflation and escalating natural disaster losses are driving premium rates up, which could lead to eventual improvement in profit margins.
It is time for AIG to boost its value as a pure-play property and casualty insurer, and the planned split will allow that, CFRA analyst Cathy Seifert said in an interview.
“Now you have a historic and protracted low interest rate environment combined with a hardening P&C insurance environment, and a stock that’s trading at a very deep discount to tangible book value,” she said.
AIG saw off a public challenge from Carl Icahn to break the company up in 2015, but investors have become restive again, Seifert said.
“Within some segments of the financial services industry, we’re seeing increased [shareholder] activism,” she said.
Investors did not give the company enough credit for its returns in life insurance as AIG worked to turnaround its struggling P&C business, Wells Fargo analyst Elyse Greenspan said in a research note to clients.
“Now that P&C results are getting better, our sense is that the company’s valuation would have been held back as returns compressed within life,” Greenspan wrote.
The decision to split the company simplifies investment prospects for the market and affirms that AIG’s property and casualty business is on track for consistent performance, Keefe Bruyette & Woods analyst Meyer Shields said in a note.
“It signals material confidence in AIG’s post-separation P&C prospects, where results have been most significantly challenged,” Shields wrote.
When previously challenged to split the company, AIG management often referred to the complications of trying to parse its rich store of tax credits accumulated when the company booked losses.
A reduction in the corporate tax rate and a recent decision from the IRS have since pared the value of those assets and could have prompted the company to reassess, Piper Sandler analyst Paul Newsome said in a research note. The company recently settled a lawsuit with the federal government that erased $400 million in tax credits from AIG’s books.
AIG’s improved capital position could also have played a role in accepting the idea of a split, Newsome said.
Another counterargument that AIG leaders had made in resisting a separation was the credit implication of giving up its diversification. Moody’s on Oct. 28 placed AIG’s property and casualty subsidiaries on CreditWatch with negative implications, citing potential loss of earnings diversification from its life and retirement business.
A potential ratings downgrade is still a possibility when the path is plotted to become two separate companies, Seifert said.
“While Wall Street may like a more streamlined story, rating agencies prefer the diversification of a multiline versus a purer-play entity,” she said.
Source: Google | Insurance News