Carl Icahn doesn’t care about too big to fail. He’s making a push to break up American International Group (NYSE: AIG). Basically, it’s just too big to grow.
Icahn’s answer is to get AIG smaller so it can grow again. Namely, getting the company into three pieces and spinoff the life/mortgage insurance businesses.
Icahn also calls it a no-brainer. But it just can’t keep pace with peers given the size. If the company breaks into three and cuts costs, buys back shares, the stock should trade at over $100 a share – so says Icahn, quoting John Paulson.
Baupost's investment process involves "never-ending" gleaning of facts to help support investment ideas Seth Klarman writes in his end-of-year letter to investors. In the letter, a copy of which ValueWalk has been able to review, the value investor describes the Baupost Group's process to identify ideas and answer the most critical questions about its potential Read More
It remains to be seen just how big the size of his position is.
Here’s the full Icahn – AIG letter:
It is my experience that in Corporate America, even when all available data points to the same undeniable conclusion and when all stakeholders desire the same mutually beneficial outcome, an external force is often still required to effect meaningful and positive change. This is the current situation in which AIG shareholders find themselves. The company continues to severely underperform its peers and is now facing an increasingly onerous regulatory burden which will only further erode its competitive position. Despite definitive action on the part of Congress and regulators to encourage this company to become smaller and simpler by splitting up, you have shown no sign of urgency and have chosen a “wait and see…for years” strategy void of decisive leadership. As a result AIG consistently trades at a substantial discount to book value. It is a “no-brainer” that the simple act of splitting this company up will greatly enhance shareholder value. AIG should immediately:
- Pursue tax free separations of both its life and mortgage insurance subsidiaries to create three independent public companies. Each would be small enough to mitigate and avert the Systemically Important Financial Institution (“SIFI”) designation.
- Embark on a much needed cost control program to close the gap with peers.
We believe there is no more need for procrastination, the time to act is now. I have already heard from several large shareholders who are frustrated with the lack of clear progress and are supportive of an AIG break up. I cannot fathom how you could ignore repeated requests from shareholders to execute a plan that would release billions of dollars of capital, free the company from onerous excess regulation, and leave shareholders owning stock in three separate, market leading insurance franchises.
“AIG is frankly overdue in following in the footsteps of all other major multi-lines in breaking up Life and P&C into separate companies. By separating into three independent companies, reducing unnecessary corporate overhead, operating at average industry returns, and buying back stock, AIG can trade at over $100 per share – 66% above its current $60 price,” John Paulson, President, Paulson & Co. Inc.
Too Big to Succeed
“We’re beginning to see discussions that these capital charges are sufficiently large it’s causing those firms to think seriously about whether or not they should spin off some of the enterprises to reduce their systemic footprint, and frankly, that’s exactly what we want to see happen.” Federal Reserve Chairman Janet Yellen, February 2014
Despite years of dismantling and selling non-core assets, AIG is still too large. The combination of life insurance and p&c insurance into a single entity offers no net benefit to shareholders (proven by industry low ROE), a fact that has driven other major multiline insurers to aggressively focus on a single line of business. We believe you must acknowledge that the current multiline strategy is not generating competitive returns. Separate monoline companies will be more focused, more efficient, generate better returns and, as a result, command significantly higher market valuations.
Additionally, “Because of AIG’s size and interconnectedness” the Financial Stability Oversight Council (“FSOC”) has deemed AIG a non-bank SIFI, subjecting the company to Federal Reserve oversight and increased capital requirements. We believe you must acknowledge that enhanced regulation is intended to be a tax on size, designed to approximate the cost that large companies impose on the financial system. The regulators have made clear that the best outcome is for SIFI’s to shrink and “reduce their systemic footprint.” If nothing is done, returns and AIG’s competitive position will continue to suffer as the SIFI regulation, including its costs and capital requirements, is fully implemented.
“The other way it [the FSOC Designation Process] can make the system safer is by providing an incentive for designated companies to change their structure or operations so they can reduce the risk they pose and change their designation and the amount of oversight. In many ways [this] outcome is more desirable than the first because it would allow business to find the more efficient way to reduce the risk they pose to the economy.” Senator Elizabeth Warren at Secretary Lew’s testimony before the Senate Banking Committee, March 2015
We believe you should immediately pursue, in the quickest and most efficient manner, a separation of both life and mortgage insurance from the core p&c insurance business. We believe all three companies would be small enough to avert the increased capital requirements and regulations associated with non-bank SIFI status. In the face of a changing and potentially punitive regulatory framework, you must realize that insurance businesses of AIG’s caliber are more valuable to shareholders if held directly than they are as part of a SIFI conglomerate.
Competitive Cost Structure
AIG’s ROE is below its peers not only because of size and capital constraints, but also because of lack of cost control. You have acknowledged that returns are below peers and must be improved, even going so far as to provide a long-term ROE goal of 10%, which is still below peers. At the same time you have suggested returns would not increase by more than 0.5% per year. Amazingly you have turned the quest for a 10% ROE into a half decade journey. The one thing we do agree on is AIG’s lack of competitiveness. Do you honestly think now is not the time for the inevitable AIG transformation? You must be proactive and commit to closing 100% of the ROE gap between AIG and its peers.
It is now incumbent upon you to explain why, despite pressure from the stock price, regulators, and shareholders, the company should not take immediate and transformative action. Achieving these two goals in combination with continued share repurchases is the only realistic path to a healthy and competitive company and, more importantly, exceed the potential of any alternative plan. AIG has taken too long already and we hope you come to the same conclusion. Time is of the essence. We look forward to engaging with management, the Board, and shareholders.
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