AIG may free up to $5bn through DSA Re

American International Group (AIG) could potentially free up between $2 and $5 billion capital through the legacy portfolio transferred to DSA Re, a wholly-owned Bermuda-based reinsurer formed in February, 2018, according to Morgan Stanley research.

AIG’s legacy portfolio includes the company's run-off general insurance lines (excess workers comp, environmental liability, public entity liability, accident & health, medical professional liability, asbestos & environmental), run-off life & retirement (L&R) lines (whole life, long-term care, and structured settlement, pension risk transfer prior to 2012), and legacy investments.

At year-end 2017, the legacy book contained $38.6 billion L&R reserves, $6.2 billion P&C reserves, and $3.7 billion legacy investments.

DSA Re reinsures around $37 billion of run-off reserves (~$32 billion in L&R and ~$5 billion in P&C). It represents about 80 percent of around $45 billion total run-off reserves. The entity is backed by roughly $40 billion investments or around $3 billion equity.

While AIG did not provide details of the remaining roughly $8 billion run-off reserves outside DSA Re, they could be supported by about $650 billion equity, applying the same reserve to equity ratio as DSA Re. That could potentially free up between $2 to $5 billion for AIG, according to Morgan Stanley analysts.

In addition to freed up capital, the analysts also think the formation of a single legal entity provides optionality for a potential divestiture to third parties focusing on run-off businesses. AIG has monetized $10 billion legacy assets in recent years, including the sales of PICC shares, Korea real estate, and its life settlement book.

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