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With AIG separation, the bell tolls for high-profile US multiline models

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With AIG separation, the bell tolls for high-profile US multiline models

The public debate over a potential separation of the general insurance and life and retirement businesses of American International Group Inc. has ended nearly five years to the day after it began.

Management and circumstances have changed, but the conclusion that distinct independent entities would have the opportunity to achieve what soon-to-be CEO Peter Zaffino characterized on Oct. 26 as "a more appropriate and sustainable valuation" bear considerable similarity to the argument activist investor Carl Icahn advanced in an open letter to the company dated Oct. 28, 2015.

Whether Icahn's premonition would have been proven correct can never be known, and a verdict on the current strategy will require the passage of time. But if nothing else, the announcement provides a symbolic end to an era of the multiline insurance conglomerate that AIG, through its blockbuster acquisitions of SunAmerica Inc. and American General Corp., championed in decades past.

In 2002, the first full year in which American General was part of AIG, the company derived 24.4% of its consolidated, pre-asbestos charge operating income from its foreign life segment, 22.8% from its domestic general insurance business, 19.9% from its domestic life operation, 9.2% from the foreign general segment, and the balance from an array of other financial services businesses.

AIG emerged from a series of divestitures amid and after the global financial crisis as a more streamlined, insurance-focused organization, but one that still exhibited considerable diversity. The North American component of the general insurance business and the overall life and retirement segment each accounted for 34% of AIG's 2019 adjusted revenues, with international general insurance responsible for 30%. It was a structure that had become increasingly unique and, arguably, not fully appreciated.

There were 88 U.S. insurance groups that generated at least $1 billion in domestic property and casualty direct premiums written in 2019, according to statutory data compiled by S&P Global Market Intelligence. Among them, AIG was one of only eight for which U.S. P&C business accounted for less than 75% of total-filed writings across sectors, joining American Financial Group Inc., American National Group Inc., Nationwide Mutual Group, Blue Cross Blue Shield of Michigan Inc. and MetLife Inc., along with the U.S. businesses owned by Germany's Allianz SE and Japan's Tokio Marine Holdings Inc. With published reports indicating that MetLife has been shopping its U.S. P&C business to potential acquirers, the number stands to dwindle further.

Various other P&C-focused U.S. insurance groups divested sizable domestic life, retirement and/or accident and health businesses during the past two decades, including the likes of CNA Financial Corp., Liberty Mutual Holding Co. Inc., Allstate Corp., Hartford Financial Services Group Inc. and the predecessor to Hanover Insurance Group Inc. Portions of the modern-day Travelers Cos. Inc. existed alongside life and annuity businesses under a giant red umbrella of financial services franchises that Sandy Weill famously conglomerated at Citigroup Inc.

The inverse was also true as life and health groups such as Aetna Inc., Cigna Corp., Lincoln National Corp. and Prudential Financial Inc. shed U.S. P&C operations during the past 25 years. MetLife retained the P&C business as part of a broader split with its U.S. retail business now housed within Brighthouse Financial Inc. in an approach that Icahn highlighted in one of his pro-separation letters to the AIG board. The U.S. life business also continues to be reshaped by international insurers parting ways with U.S. franchises such as the ING Groep NV split with what is now known as Voya Financial Inc. and Prudential PLC's planned separation with Jackson National Life Insurance Company and certain related entities.

A number of high-profile mutuals and other privately held insurers such as the groups led by State Farm Mutual Automobile Insurance Co., United Services Automobile Association, Federated Mutual Insurance Co., COUNTRY Mutual Insurance Co., Alfa Mutual Insurance Co. and Sentry Insurance A Mutual Co. continue to pursue multiline strategies, though their P&C premium volumes vastly exceed their production in other lines. Kemper Corp. offers basic life and accident and health products in an approach that President and CEO Joseph Lacher Jr. said during an August conference call provides "diversification benefits and enhanced capital efficiency" to the overall organization. Progressive Corp., which currently refers P&C customers interested in life insurance products to an unaffiliated agency, established a new life subsidiary for unidentified purposes in June.

At AIG, the breadth of its business by product and geography once ranked among its strongest attributes. It was, as management used to say, a franchise that could not be replicated.

Today, it is a franchise that most likely would not be replicated.