AIG Sells Off Mortgage Business to Focus on Core Operations

American International Group, Inc. AIG has completed the sale of its mortgage business unit United Guaranty Corporation (UGC) to Arch Capital Group Limited ACGL.

UGC is the leading private mortgage insurance company in the United States with $186.4 billion of first-lien primary mortgage insurance in force as of Sep 30, 2016. The deal was announced last year while the company was scanning to shed non-core businesses to make its business leaner and focus on the ones generating higher returns.  

This mammoth underperforming insurer has been aggressively recalibrating its business after investor Carl Icahn called for its speedy turnaround. According to Icahn, the company’s business was so divergent that instead of giving benefits of diversification it posed a hindrance due to lack of synergy.

Last year, the company took several steps in this direction. Shares have however returned 8.1%, underperforming the Zacks categorized Insurance Multi-Line industry’s return of 13.6% for 2016.  The underperformance shows that investors are closely watching the several turnaround actions taken by the company and their outcome. We expect the stock to gain going forward as and when the growth initiatives start bearing fruit, resulting in clear visibility for the company’s profitability.

In 2016, AIG completed the sale of its Taiwan unit. It also sold Advisor Group to investment funds affiliated with Lightyear Capital LLC. Moreover, it announced that it will sell its Japan life insurance business AIG Fuji Life Insurance Company, Ltd. (AFLI) to FWD Group, the insurance arm of Pacific Century Group. It entered into strategic agreements with Fairfax Financial Holdings Limited to offload its commercial and consumer insurance operations in Argentina, Chile, Colombia, Uruguay, Venezuela and Turkey.

Another effort to improve profitability was to reduce cost. Through the first nine months of the year, AIG remained ahead of its 6% planned reduction with a 10% decline in gross operating expense. The company expects expense reductions to extend into 2017 and remain ahead of its plan as a result of actions taken across its operations.

Apart from fixing parts of its business and reducing costs, the company has taken steps to free up capital. In this regard, a Life Reinsurance transaction was completed in the third quarter that resulted in the distribution of approximately $1 billion of excess statutory capital from its U.S. life companies to AIG.

While this was the company’s first completed Life Reinsurance transaction that is expected to free up $4 billion to $5 billion of capital by the end of 2017, AIG remains focused on and confident about executing further Life Reinsurance transactions. The company has also halved its hedge fund allocation, which is expected to free up $2 billion to meet its capital return target by the end of 2017.

AIG carries a Zacks Rank #3 (Hold). Better-ranked stocks from the same sector include Loews Corporation L and Reinsurance Group of America Inc. RGA. While Loews sports a Zacks Rank #1 (Strong Buy), Reinsurance Group carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The 2016 Zacks Consensus Estimate for Loews Corporation and Reinsurance Group has each gone up over the past 60 days and 90 days, respectively.

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