AIG: The Value Of Togetherness

   (FROM THE WALL STREET JOURNAL 2/11/16) 
   By Steven Russolillo 

American International Group Inc. has repeatedly resisted overtures from investors Carl Icahn and John Paulson to break up the business. The more that interest rates fall, the better that AIG's argument looks.

More than a month after the Federal Reserve raised its benchmark rate from zero, both short- and long-term rates have fallen. Now, many investors anticipate low rates won't go away anytime soon amid economic risks and broad market turmoil.

While those conditions tend to hurt large insurers, AIG, for now at least, has the benefit of diversification on its side. That should help when it reports fourth-quarter results Thursday. Analysts expect a loss of 92 cents a share, although that is mainly due to an announced $3.6 billion reserve charge.

For years, AIG traded at a steeper discount to book value than many of its peers. That bolstered Mr. Icahn's case for a breakup, as it suggested AIG isn't reflective of its full value.

But things have changed. AIG shares are down about 15% this year, which isn't as bad as some other insurance or bank stocks. And trading at about 10 times projected earnings, AIG commands a more expensive price/earnings multiple than life-insurance rivals such as MetLife Inc., Prudential Financial Inc. and Lincoln National Corp.

In essence, the market is giving AIG a pass that many other insurers aren't getting. Low rates hurt the profitability of life insurers, which hold long-term assets to pay future claims. That is because falling rates inflate the present-value terms of those claims.

But AIG has a buffer: It also has a property-casualty business that is less afflicted by low interest rates. And the market is suggesting that the more-lucrative property-casualty insurance business is, in effect, subsidizing the life business.

In a strategy update last month, AIG laid out plans to reorganize its core operations into nine units, part of an effort to increase transparency. AIG also committed to returning at least $25 billion to shareholders over the next two years through buybacks and dividends.

In this tough market for financials, an undivided AIG offers a bit of hope.

(END) Dow Jones Newswires

February 11, 2016 02:47 ET (07:47 GMT)

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