Yesterday, Icahn unveiled a new large target, AIG(AIG). AIG ,the largest bailout recipient in the 2009 financial crisis at over $180 billion, is large, with a market cap of over $80 billion, but far smaller than Apple’s $680 billion market cap. AIG is still classified, however as a Systemically Important Financial Institution. Icahn shared a public letter to the CEO of AIG. In the letter, Icahn asks the company to do two things:
- 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.
Icahn quotes hedge fund manager John Paulson, famous for his massive profit from credit default swaps during the mortgage crisis as a supporter of the split.
“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.
Icahn’s key argument for the split, aside from the usual arguments of focus is the benefit from avoiding regulation associated with the SIFI designation.
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.
Peter Hancock, AIG’s CEO has, thus far, taken a different approach to organizing the company.
Hancock, 57, who took over as CEO last year, reorganized AIG into two main divisions with one focusing on commercial clients and the other on individual consumers. He said the arrangement responds to customer demand and makes more sense than the previous split, which had a life unit and a property-casualty operation.
In response to Icahn’s letter, Hancock issued a noncommittal statement about listening to shareholders and the company’s determination to accelerate its simplification.
Peter D. Hancock, AIG President and Chief Executive Officer, said, “AIG maintains an open dialogue with all our shareholders and welcomes their feedback and ideas. We have taken important and significant steps to reposition AIG by both simplifying and de-risking the company, and realizing attractive valuations from non-core asset sales. We remain on course and are determined to continue and accelerate these efforts. We look forward to sharing our progress and strategies at our regularly scheduled earnings call on Tuesday.”
Next week may be too early for a comprehensive response and we’ve yet to hear how large Icahn’s stake in AIG is. But with Icahn and Paulson involved this is likely a situation we will be hearing more about.
Disclosure: The author holds shares of Apple
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