The AIG logo is seen on the AIG building in Tokyo, Japan. File picture: Michael Caronna, Reuters

New York - American International Group plans to return $25 billion to shareholders over the next two years as Chief Executive Officer Peter Hancock divests assets and seeks to boost returns to protect his job amid criticism from activist investor Carl Icahn.

Hancock will offer a 19.9 percent stake in the mortgage insurer United Guaranty Corporation to the public in a step toward a complete exit of that business, AIG said on Tuesday in a statement. The insurer also is reorganising into “modular” business segments to create flexibility to sell or take public additional units if they underperform or draw attractive bids. Hancock’s vow on shareholder returns follows a total of about $12 billion in 2015, which included buybacks and dividends.

“The $25 billion capital return is eye-catching to say the least,” David Havens, a debt analyst at Imperial Capital, said in a message. “They are navigating a middle ground that preserves most of AIG as it is now, but offers the flexibility to spin off or sell units in the future.”

Divestitures, reinsurance

Profits from operating units and tax benefits will contribute up to $10 billion of that sum, AIG said in a slide show, while proceeds from divestitures will add as much as $7 billion. The company said reinsurance deals, in which other firms take on risks that were initiated by AIG on life contracts, could provide $4 billion or more. AIG also projected benefits from reducing leverage.

“We’re in the business of making large, long-term promises, and so we don’t expect all stakeholders to be as happy as others, but we think we’ve chosen a path here for sustainable value creation,” Hancock said in an interview. “There are plenty of financial intermediaries that would love a fire sale, and we don’t want to play into their hands at all. We want to have a thoughtful reshaping of the company.”

Icahn reacted to AIG’s announcement by repeating his call for the insurer to be split up, the Wall Street Journal reported, citing an interview with the investor. Icahn didn’t immediately reply to requests for comment.

AIG climbed 1 percent to $55.91 at 4pm in New York. The company, which offers both life insurance and property-casualty coverage, trades for about 70 percent of book value, while large P&C carriers such as Chubb and Travelers Cos are valued at more than the metric of assets minus liabilities.

Legacy portfolio

The CEO also announced the creation of a “legacy” portfolio of assets, encompassing about $22 billion of adjusted equity, that he will sell or wind down. Hancock designated Charlie Shamieh, who oversaw life, health and disability operations, as legacy CEO.

Shamieh’s new portfolio includes shares in China’s PICC Property & Casualty Co. It also contains a so-called life- settlements book. In life settlements, AIG buys insurance policies from individuals and pays premiums until they die, when the company collects the payout. The arrangement becomes less profitable for AIG the longer the person survives, and the company has been burned by losses on the contracts in prior quarters.

The core operating portfolio will have nine modules and account for about $56 billion in equity. They include US commercial coverage, European commercial, US retirement and the Japan division.

‘No sacred cows’

Hancock asked for investor patience when it comes to possible sales for the largest units.

“There are no sacred cows and we mean that,” he said in a presentation to investors and analysts. “But we also mention that there are important tax and diversification reasons that would preclude major divestitures in the short term.”

AIG said Tuesday that it is targeting a consolidated return on equity of about 9 percent by next year, with at least 10.3 percent in the operating portfolio that Hancock sees as the core of the business. He also announced expense reductions of $1.6 billion within two years.

Operating ROE trails rivals at AIG and was 7.1 percent in the nine months through September. “Amazingly, you have turned the quest for a 10 percent ROE into a half-decade journey,” Icahn said in October.

Hancock announced $3.6 billion in expenses Tuesday to fill a reserve shortfall, highlighting weaknesses even at units that Icahn envisions as central to scaled-back company. The fourth-quarter pretax cost to fill the gap includes $1.3 billion tied to policies from 2004 and earlier, with the remaining $2.3 billion covering the period of 2005 through 2014. The New York-based insurer has been stung repeatedly by higher-than-expected costs from risks that the company assumed in the past, whether from environmental liabilities or workers’ compensation policies.

‘Right lessons’

“In hindsight, maybe we could’ve done more” to cut back on domestic casualty business, Hancock said in an interview. “I’m very confident that we’re learning the right lessons from the emerging pattern of claims that has led to this reserve adjustment.”

AIG was built into the world’s largest insurer by Maurice “Hank” Greenberg, and each of the five men who held the CEO post since his 2005 departure has grappled with the firm’s complexity. The company shrank by half as AIG sold assets to repay a 2008 bailout, and Hancock narrowed the focus further after taking over in late 2014. He sold stakes in aircraft lessor AerCap Holdings NV and lender Springleaf Holdings Inc. while parting with businesses in Central America and Taiwan.

“After a decade of trying to fix the firm, given the substantial structural disadvantages unique to AIG, we believe breaking up AIG and selling it off piece by piece to its structurally advantaged peers is simply a more realistic path to creating shareholder value,” Josh Stirling, an analyst with Sanford C. Bernstein & Company, said on Monday in a note.

Icahn’s view

Icahn proposed in October that Hancock split AIG into three separate companies, saying the insurer needs to shrink to escape its status as a systemically important financial institution, which can lead to tighter capital rules from the Federal Reserve. The billionaire sent a letter to AIG last week, telling the board that management could lose credibility if Tuesday’s presentation fails to outline a drastic change. Hancock has said that regulatory costs are not overly burdensome, and that the insurer will continue to be highly regulated even if it’s not a SIFI.

“AIG believes that a full breakup in the near term would detract from, not enhance, shareholder value,” Chairman Doug Steenland said in a statement. “The board’s actions reflect its full support for the plans that Peter Hancock and his management team have put forward.”

Greenberg’s view

Greenberg said in a televised interview with Bloomberg’s Betty Liu that Hancock was right to rebuff Icahn’s breakup plan but still has to prove that he’s the right person to lead AIG.

Insurer MetLife, one of the other three non-bank SIFIs, said this month that it will separate a domestic retail unit with $240 billion in assets through a sale, spinoff or public offering as CEO Steve Kandarian seeks to limit regulation. General Electric said last week that it is targeting a March exit of too-big-to-fail status after wrapping up deals to sell commercial lending assets and unload a Utah bank charter.

AIG’s mortgage guarantor contributed $464 million in pretax operating income in the first nine months of last year, or about 12 percent of the total from commercial insurance. The United Guaranty unit is probably worth $3.5 billion or less, according to estimates in the past week from analysts John Nadel of Piper Jaffray Cos and Meyer Shields of Keefe, Bruyette & Woods. They cited the share plunges this year of publicly traded mortgage insurers like MGIC Investment Corp. and Radian Group. That compares with AIG’s market value of more than $68 billion as of Monday’s close.

AIG also announced on Tuesday that it is selling its Advisor Group to funds affiliated with Donald Marron’s Lightyear Capital and by PSP Investments, a pension fund manager in Canada. The insurer didn’t disclose terms of that deal.

* With assistance from Dan Reichl and Katherine Chiglinsky