In Full: AIG link with Voya brings 2020 challenges into focus
As we have previously written, for AIG the hard part starts in 2020...
After doing the immediate high-yield and necessary first steps of an insurance turnaround (= re-underwriting), management now faces the harder and slower acting challenges of improving operations, lowering unsustainable expenses, and re-allocating capital in a challenging environment.
These 2020 challenges were brought sharply into focus this week, with press reports yesterday suggesting AIG was one of the names in talks with US retirement plan provider Voya over a potential sale, according to reports in the Financial Times.
We do not mean to over-interpret a rumor. Everybody talks. But we think the report highlights the multiple potentially competing challenges facing AIG.
Despite an opportunity to buy back its own stock at a steep discount, management has consistently signalled a preference for reducing leverage and reinvesting in the business through M&A. Back in 2017 when CEO Brian Duperreault was taking the reins, he talked up his record of acquisition-driven value creation and said likely focus areas for AIG included "internationally, in personal lines, life insurance and in the US small to middle market".
Recall, Voya was spun out of Dutch insurer ING in 2013. It has a market cap of around $8.3bn (= digestible) and predominantly writes variable and fixed annuities in the US. The company is trading at a ~20 percent discount in book, in part driven by the challenging interest rate environment.
To the extent that its acquisitions to date have been in P&C, a switch to life could be considered pursuit of balance, though Voya’s US focus would bring little in the way of potential capital synergies. On the other hand, from a financial perspective, with a valuation of ~80 percent of book, it is one of the few meaningful transactions available that AIG could execute in insurance without bumping into dilution issues. There could also be potential in scale and distribution.
However, we remain concerned around the potential for large scale M&A. As we wrote in AIG: The Path Forward, management already faces a difficult balancing act delivering on its commitment to dramatically reduce expenses (by ~500bps in P&C) while simultaneously pledging to have the best operating capabilities of its peers within two to three years.
Given that AIG’s operating challenges are in a large part a function of its failure to properly integrate business combinations from its last period of expansive M&A, we remain concerned that the benefits from financially engineering earnings through acquisitions in the short run will be outweighed by the additional operating and financial complexity and integration challenges in the long run.
However, as we have written before, with holding company liquidity back over $7bn (and growing) and financial leverage down ~3pts since year-end at 26 percent total debt-to cap at Q3, capital will need to be redeployed or else become a significant drag on ROE goals.
Again, we acknowledge that this is an unconfirmed rumor. But we think it offers an interesting test case for AIG’s multiple stated priorities.
On the one hand, deploying capital through acquisitions while meeting return hurdles will be challenging in a world of inflated values for insurance assets. On the other, buying lower quality assets that add operating complexity conflicts with AIG’s operating priorities to the extent they have been teased in its “AIG 200” plan.
Ultimately, we expect something will have to give in terms of the company’s multiple, but competing, commitments to its stakeholders, and that the company will need to make clearer the intended timing and sequencing of its strategic priorities.
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