Carl Icahn To Get Peter Hancock Fired From American International Group Inc (AIG)
Join our free newsletter for some exclusive info we don’t share elsewhere. American International General (NYSE: AIG) is trying to back down activist investor Carl Icahn with a “streamlining” of the insurance giant. This includes spinning off part (~20%) of its mortgage insurance business, United Guaranty Corp. – a business that generates less than 10% of pre-tax operating profits. It plans to spin-off the rest of the business later and will move ahead with the sale of its broker-dealer AIG Advisor to Lightyear Capital.
This, understandably, isn’t enough to appease Icahn, where the move shows some urgency by American International Group, but the move just isn’t transformational. His activist hedge fund owns just over 3% of AIG and is a top five shareholder. Icahn’s thesis is that AIG should split into three publicly traded companies to reduce regulatory expenses and capital requirements.
Hedge Funds: Small Firms Profit As Big Names Close In 2020
At the beginning of July, Lansdowne Partners, one of Europe's oldest and best-known hedge fund managers, announced that it was closing its flagship hedge fund after a run of poor performance. The closure is the latest in a string of high-profile hedge funds that have decided to shut up shop in recent years. Billionaire investor Read More
Icahn has some support for this plan, with the likes of Metlife (NYSE: MET) deciding to divest part of its US life insurance business in hopes of evading the SIFI designation. American International Group could split its life insurance and property & casualty businesses to help avoid SIFI; however, AIG insists that a full-blown split would impair its deferred tax benefits.
Still, a full break up is the next logical step in American International Group’s recently battered history. It’s managed to pay back the US Treasury, sell off various assets and cut its balance sheet in half, but there’s still the overhang of the $180 billion government bailout.
Hancock has to go
Icahn’s battle is with American International Group CEO Peter Hancock, who was brought into AIG in 2010. Hancock has a banking background with no previous insurance experience. With that, the property & casualty business has languished under Hancock. Right now, the life insurance business is the bright spot.
Icahn looks to be calling AIG CEO Peter Hancock’s bluff. Icahn is planning to put together his own list of board members, gearing up for a proxy fight.
American International Group trades at just 70% of book value, but also has a return on equity of 4.5%. Something that streamlining into nine businesses can’t fix. Travelers (NYSE:TRV) is generating a 14% ROE, Allstate (NYSE: ALL) is at 12%, and Progressive (NYSE: PGR) is at 18%. ROEs that AIG won’t reach under the SIFI designation and without a further breakup. Right now, AIG is hoping to get ROE up to 9% by 2017.
There is the fact that AIG is looking to return some $25 billion in capital to shareholders over the next 24 months and cut costs by nearly $2 billion. They’ve promised further divestitures down the road. We might not have to wait that long. Icahn is getting more serious about putting further pressure on AIG to break up fully. American International Group and only two other insurers, Metlife and Prudential (NYSE:PRU), have the SIFI designation.
Something must be done, with American International Group grossly underperforming peers in not just ROE terms. Its combined ratio (a measure of costs/claims versus premiums in the P&C business) is ~103%. The likes of TRV and Chubb (NYSE: CB) have combined ratios of under 90%.
AIG is still a limbo play. They need a more robust plan to streamline the business before getting involved. Look for Icahn to get even more vocal as the Feb. 13 deadline for nominating potential board members approaches.