American International Group, Inc. (AIG) executives are being pressured by well-known activist investor Carl Icahn to break the company up into three parts: one for Property and Casualty (P&C) insurance, one for Life insurance and the third backing mortgages. Icahn argues that the breakup would improve AIG's financial position by theoretically removing the company's systemically important financial institution (SIFI) designation (along with related capital requirements and regulations), as well as reducing costs and expense ratios.
However, Moody"s Investors Service warns that such a move would have unintended consequences of the credit-impairing kind, and has released an official comment on the proposed breakup.
Among the many considerations both pro and con to such a breakup is the effect on AIG's credit rating, Moody's says, as well as the potential rating for each of the three new companies. In its Nov. 2 Credit Outlook, Bruce Ballentine, vice president and senior credit officer, and Christian Plath, vice president and senior credit officer, expressed the opinion that a breakup of AIG and loss of SIFI status (assuming this would actually result) would be "credit negative" for the company, removing the diversification benefit of the multiline insurance operations and the capital and risk management oversight that the U.S. Federal Reserve applies to nonbank SIFIs. "A step-up in share repurchases would be credit negative to the extent that it reduced the capital adequacy of the ongoing businesses," the outlook says.
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Rosalie Donlon
Rosalie Donlon is the editor in chief of ALM's insurance and tax publications, including NU Property & Casualty magazine and NU PropertyCasualty360.com. You can contact her at [email protected].
