Is this the right time for AIG “Break up”?Sachin Mohan
This not for the first time in insurance industry that a company is thinking from a pure play perspective. Very recently Prudential Plc decided to spin off Jackson National, so that it can focus on Africa and Asia more. However, the objective of spin off for Prudential is different from AIG. One of the similarities I see is with Travelers Group spin off if we put DTA advantage aside. Long back when Travelers Group merged with Citicorp, (we have seen that when two different businesses tried to merge together), it didn’t work out and it was spun off.
Few years back there were some discussions amongst key investors on splitting up AIG into two- because of the diverse nature of Life & retirement and property and casualty business. Pure play is very lucrative for investors. Investors prefer pure play and focused companies more than diversified firms. The one reason that I understand is in diversified firm profitability of a profit-making segment can be offset by loss making segment- less accountability. Whereas investors always have an option to diversify their investments; rather than investing in firm that is diversified. So, during early years suggestion by key investor to split AIG into two segments was not considered and turned down due to the DTA advantage that AIG was having. Let’s go to history of AIG DTA to understand it better.
During the financial crisis AIG has insurmountable losses. As we know AIG was not the only company that had losses. Interesting twist here is that companies who had losses were the lucrative target for acquisition due to loss carry forward by acquirers. However, some of the acquirers faced major problems in loss carry forward of acquired company in accounting under section 382 of IRC which talks about Limitation on net operating loss carry forwards and certain built-in losses following ownership change. Most of the losses expired before it can be used. However, AIG was able to carry forward its losses. This loss carry-forward along with foreign tax credits constitutes DTA for AIG (Deferred tax assets)- which can be considered as one of the factors why split didn’t happen till now.
AIG benefitted from the DTA at that time. According to Peter Zaffino, the DTA benefit has shrunk since then. So, is the DTA only the sole reason for AIG split now? I believe other market factors as well, when combined together gives more reason for split. We have seen the market hardening since last year and trend remains same till now. It is expected that market would remain hard in 2021 as well. The rate increase and long term prospect of P&C industry would help P&C standalone business to gain ground, and thrive. Life & retirement business has completely different playground. Keeping them together probably would be too much of baggage at this time. But, what if AIG waited a little more to further improve underwriting and capital- a strong pillar for stand-alone P&C business; given the fact that it still has some DTA for its advantage?