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AIG’s Restructuring Initiatives to Take Further Shape in 3Q

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Restructuring spending

American International Group (AIG) has announced that it will spend $500 million on restructuring initiatives for organizational simplification, operational efficiency, and business rationalization. The company’s second-quarter results included $90 million in pretax restructuring, which is primarily related to previously announced actions.

In the September quarter, the efforts for controlling expenses and reorganizing activities is expected to continue as AIG seeks to improve operating performance.

The initiatives are expected to generate annualized savings of approximately $400 million–$500 million when fully implemented. Of the total savings, $300 million will be in employee severance and one-time termination benefits, concentrated mainly on the senior levels of management.

AIG is expected to save another $100 million in costs associated with the modernization of its information technology platforms. The balance of the savings will be related to costs associated with the consolidation of legal entities and exiting the businesses with lower returns.

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Inorganic and strategic actions

AIG announced the sale of AIG Advisor Group in January 2016. The company has announced an IPO (initial public offering) of up to 19.9% of United Guaranty, subject to regulatory approvals, as the first step toward a full separation.

It also announced an agreement to sell operations in four Central American countries during the fourth quarter. The company also entered into a two-year reinsurance arrangement with Swiss Re Group in which a proportional share of its new and renewal US Casualty portfolio is being ceded. The arrangement will reduce the impact of the US Casualty loss ratio on the company’s overall loss ratio to go along with its strategic plan.

AIG also grew its book value per share by ~13% during the past year. Book value growth per share was ~5% for MetLife (MET) and Allstate (ALL) and ~8% for Chubb (CB) in the past year.

Insurance players (XLF) with bets in mortgage-backed derivatives faced huge losses after the 2007 financial crisis, resulting in higher risks of bankruptcy. Following the financial crisis, the US government gave AIG $182 billion in bailout aid after the company suffered huge losses on mortgage-related derivatives bets.

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