KBW Analyst Dismisses AIG Mortgage Business Spinoff
American International Group Inc.’s plan to spin off a portion of its mortgage insurance unit is “almost pointless” given the challenges that Chief Executive Officer Peter Hancock faces to fix the much larger property/casualty business, an analyst at Keefe, Bruyette & Woods said.
“AIG’s fundamental problem is very poor P&C profitability, and absent really fantastic price tags, we really don’t see the point of selling better-performing businesses so it can buy back more shares of the remaining underperforming businesses,” KBW’s Meyer Shields said in a note to investors dated Sunday. “Mortgage insurer valuations have compressed significantly over the past two years, so the timing of this planned spinoff is also very far from ideal.”
Hancock has scheduled a presentation for Tuesday to outline his vision for New York-based AIG after rebuffing calls from activist investor Carl Icahn to break up the company. The CEO’s plan includes a partial spinoff of the mortgage insurer, United Guaranty Corp., a person familiar with the matter said Friday. Icahn has said AIG needs to shrink to exit its status as a systemically important financial institution, or SIFI, a tag that can bring tighter Federal Reserve oversight.
“It seems very unlikely to us that divesting a minority of United Guaranty would free even that unit from any SIFI-related capital and/or expense requirements,” Shields wrote.
Mortgage insurers cover losses for lenders when homeowners default and foreclosure fails to recoup costs. UGC is among the guarantors that survived the financial crisis, along with publicly traded rivals MGIC Investment Corp. and Radian Group Inc. MGIC and Radian have each plunged more than 20 percent in New York trading this year through Friday. MGIC said last week that increased competition and tighter regulation may pressure sales.
Shields estimates United Guaranty will generate $682 million of pretax income next year, suggesting a valuation of $3.2 billion based on rivals’ share prices. Even if the industry trades at last year’s pre-slump levels of price to earnings, that implies a valuation of $4.6 billion to $5.5 billion, meaning AIG “would be selling about 7.7 percent of its 2017 pretax income for 6.6 percent to 7.9 percent of its current market capitalization,” Shields wrote.
The analyst raised his rating on AIG to outperform in the middle of last month, from market perform, saying that a recent management shakeup provided a path to rebound. The company has posted a smaller declines than the Standard and Poor’s 500 Financials Index since he lifted the rating.
[The Wall Street Journal first reported in October that AIG directors had been discussing the sale of the company’s mortgage insurance business “for a while” but no final decision had been made about the unit.]