According to an article in the Wall Street Journal, American International Group Inc. (AIG) directors are discussing a spinoff or sale of the insurer's small mortgage-insurance business in the wake of shareholder pressure to break apart the conglomerate. The discussions have been under way for a while, and no final decision has been made about the unit, which sells coverage that protects mortgage investors and lenders against losses, the people said. An AIG spokesman declined to comment.
AIG's mortgage-insurance operation is considerably smaller than AIG's other businesses, representing roughly 5% of pretax operating profit during the second quarter. But it posted the largest increase in pretax income during the first six months of 2015. AIG is one of the world's largest insurance companies, with a market value of roughly $82 billion.
The separation of AIG's mortgage insurer would fall short of calls from shareholders Carl Icahn and John Paulson to break AIG into three pieces-mortgages, life and property-casualty.
The two billionaires have urged the company to consider the three-way split as a way to boost the company's stock and escape regulations imposed by federal policy makers.
AIG had to be rescued during the 2008 financial crisis in one of the biggest bailouts by the U.S. government. It finished paying taxpayers in late 2012 and has been struggling since to boost critical measures of profitability as it battles pricing pressures. Through June 30, AIG's return on equity for the year stood at 8%, well below its rivals.
Mr. Icahn conveyed his demand in a public letter this week to AIG Chief Executive Peter Hancock, while Mr. Paulson advocated a similar breakup in conversations this year with senior management that executives then passed on to board members, said people familiar with the situation.
Mr. Paulson himself first approached Mr. Hancock with his ideas in March, shortly before General Electric Co. CEO Jeffrey Immelt decided to unwind GE Capital because of stricter oversight that the company said crimped its banking business's profitability, said people familiar with the matter. A partner with Mr. Paulson's hedge fund Paulson & Co. has also shared the same breakup ideas with analysts who follow AIG, said people familiar with the situation.
AIG's Mr. Hancock said Wednesday that AIG welcomes ideas from investors but already is on course to simplify its operations and risk. He will have another opportunity to respond Tuesday during a scheduled conference call with analysts. AIG is scheduled to report third-quarter earnings on Monday. It is expected to post lower operating income compared with a year earlier.
Mr. Hancock, who took over as CEO in September 2014, has taken some steps to address shareholder concerns. Last summer, the company increased its common-stock dividend by 124% and said it would buy back more shares.
Shortly after Mr. Paulson presented his three-way breakup case to Mr. Hancock, the CEO also used his annual shareholder letter in April to outline the advantages of AIG's current structure.
The company, he said in the letter, balances risk "across products, geographies and clients" and its current structure can absorb higher compliance, risk management and technology costs, among other perceived advantages.
The CEO also hinted at other moves AIG might make to satisfy shareholders, including "floating or selling businesses that lack current or realizable potential synergy with our core operations."
Analysts have long speculated that AIG could look to separate its mortgage-insurance business. Some inside the company view mortgage insurance as "not really core," one person close to the matter said.
The unit generated $261 million in revenue during the second quarter, the smallest of AIG's six business segments.
Private mortgage insurance occupies one of the lower-profile corners of the financial world and nearly went extinct during the last housing crisis amid heavy homeowner defaults.
Home buyers putting less than 20% down are required to obtain the coverage. If the home is lost to foreclosure, the insurer takes the first loss.
Mortgage insurers began to post better results due to higher credit quality of underlying loans, fewer defaults and stiffer standards as the U.S. economy began to improve. Hedge funds including Paulson & Co. invested in the sector.
Separating that business from AIG now would be far easier than a breakup of AIG's two major businesses, said a person familiar with the situation. Such a move is "just a matter of timing," this person said.
Executives don't believe AIG's best strategy involves "radical changes to keep Carl Icahn in line,'' this person added.