AIG Should Spilt into 3 Insists Icahn: Will this Pay Off?

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American business magnate and billionaire investor Carl Icahn is putting pressure on Peter Hancock, the chief executive officer of American International Group, Inc.AIG , to split up the mammoth company into three parts - property and casualty, life and mortgage insurance.

The activist investor who is the fifth largest shareholder in the company, initially suggested the division of AIG in a letter, dated Oct 28, addressed to the AIG chief. But upon receiving an adverse response from Hancock, who believes that breaking up the company would not make much financial sense, Icahn is now planning aggressive steps to make his desired changes.

The iconic investor is mulling over a "consent solicitation" and does not want to wait till the company's next annual meeting due in spring. Consent solicitation is a request made to shareholders to agree to the changes to be made to the security. Via the consent solicitation, shareholders will directly express their views to the board. Icahn is also threatening to oust the CEO, with plans to propose a director who would replace Hancock, if asked by the board to do so.

Icahn doesn't want to wait longer for slow responses from the company. He rather wants to speed up the process of carving out the company which he believes will unlock massive value for its shareholders.

AIG, one of the largest global insurer, serves customers in over a hundred countries and jurisdictions through its three distinct business lines. But interestingly, AIG's enviable business diversity and colossal size are the villains in its own growth story, as per Carl Icahn.

Icahn pointed out in his last letter that the company is "too big to succeed" and that it widely lags its peers in terms of generating returns for its shareholders due to constrains such as size and capital. The company faces stringent capital restriction that hampers its competitiveness. He also blamed lower return on AIG's lack of expense management. Icahn lashed out on AIG's management, which estimates an increase in returns of not more than 0.5% per year. Now, that would translate into returns of 10% in 50 years!

Past Troubles and Current Challenges Faced by AIG

Back in 2008, AIG was hit by the subprime mortgage crisis because of its huge bets on subprime-mortgage securities which soured when the housing market crumbled. That year, AIG reported the biggest quarterly loss in the U.S. corporate history, verging on a collapse. It was then that the government took control over the company by bailing it out with $85 billion loan funds. Since then, the company suffered losses until 2014, when it finally crawled back to profits.

As a recipient of bailout money, AIG was subjected to significant government intervention including restrictions on its administrative and operational policies. Despite the complete sale of the Treasury's stake, risk of other fresh regulatory challenges rose, as AIG was designated a non-bank systemically important financial institution (SIFI) status in Jul 2013. The company is now under the supervision of the board of governors of the Federal Reserve System.

Steps Taken by AIG Slower than Warranted

Icahn in his last letter also said that AIG has been repeatedly suggested by regulators and the Congress to reduce its size. Yet management turned a deaf ear, perhaps, only to show progress at a snail's pace on this front. Though AIG has done its bit to reconstruct itself after the financial crisis by divesting more than $75 billion of assets since 2009, including a range of non-U.S. life insurance businesses plus the aircraft-leasing division, Icahn views the development as slow.

The indolence has eroded the company's stock price, which trades below its book value. Moreover, since almost all the proceeds from divestitures went toward repaying the government loan, the company could not invest in its own business. Of course, asset disposals liberated AIG from severe debt, but it also shrunk its portfolio and global market share, making it vulnerable to cutthroat competition from its peers.

Will the Breakup Help AIG?

The suggestion of slicing up of the company, built up gradually over the years by its former chief executive Hank Greenberg, is not new. Back in 2011, Harvey Golub, the then chairman commented that the company should be split for long-term growth because its two main business lines have "no strategic fit between them." He had also pointed out that segregation of different business units "may unlock much greater value."

The restructuring, as advised by Icahn could lead to the end of AIG's 90-year tradition as a standalone global insurance conglomerate - diverse parts of which are not generating enough synergies. Icahn staunchly believes that segregation of the company into smaller, proficient parts will save it from onerous capital regulations under the SIFI regulations that that have been imposed on it. A smaller and more streamlined business will also attract investors, who seek a focused business that is easier to understand and manage.

AIG carries a Zacks Rank #5 (Strong Sell). Some better-ranked stocks are Old Republic International Corporation ORI , Assured Guaranty Ltd. AGO and FBL Financial Group Inc. FFG . While Old Republic sports a Zacks Rank #1 (Strong Buy), Assured Guaranty and FBL Financial carry a Zacks Rank #2 (Buy).

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AMER INTL GRP (AIG): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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