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Shares of insurer American International Group (NYSE: AIG) are now down more than 10% since activist investor Carl Icahn first pitched his thesis for splitting up the company back in October.
However, he now has more support for his thesis than ever. Icahn, as well as famed hedge fund manager John Paulson, think that AIG is worth more separated into three companies. In particular, breaking the insurer into three companies would allow it to get rid of the SIFI (systemically important financial institution) designation.
AIG is one of three insurance companies that have the SIFI designation. This designation brings with it extra compliance costs and greater oversight from regulators. Icahn has said in the past that AIG is “too big to succeed.” Now, Icahn has put out a new open letter to the AIG board this week reiterating these thoughts. But he has some serious support now.
Backing Up Icahn’s Thesis
The first catalyst that could push AIG closer to a split is the fact that MetLife (NYSE: MET) is looking to shed its U.S. life insurance business. MetLife announced last week that it’s planning to become small enough to rid itself of the SIFI designation with the reduction of the U.S. business.
But Icahn doesn’t think that just splitting up AIG would unlock value. He’s also open to shrinking the company by selling bigger units and focusing on property casualty coverage.
The second catalyst for Icahn is a recent AIG shareholder survey by Sanford C. Bernstein, which appears to support Icahn’s thesis. Over 80% of AIG shareholders say they’re unhappy with the lack of urgency of management. Nearly 75% of shareholders want the company to get rid of the SIFI designation.
What Next?
Icahn is watching the upcoming AIG update meeting, to be held on Jan. 26. He’s looking for more than just cost cuts and small asset sales.
Icahn says that just the announcement of small asset sales without a transformative strategy would be a disappointment. Specifically, if AIG announces anything short of a plan to shake the SIFI designation Icahn maintains that “the little credibility management now has will be lost.”
And back to the Bernstein shareholder survey: Only 9% of respondents said they would support management if they pursue a strategy of modest cost cutting and small divestitures.
In the past, Icahn has alluded to waging a proxy battle to get a board seat at AIG. Per Icahn’s recent letter, he notes that he had a conversation with AIG Chairman Doug Steenland about whether the board would support a move to oust CEO Peter Hancock if shareholders revolt.
The response by Steenland was positive for Icahn’s possible plans. Icahn notes, “I was happy to hear this open mindedness because I believe management’s credibility with shareholders is all but gone.”
AIG management – and Hancock in particular – have pushed back against a breakup of the company because it would wipe out a third of its tax assets. However, Icahn notes that these deferred tax asset values decline over time anyway.
There’s no time to wait, and more value will likely be unlocked with a shrinking of the company (and the creation of its spinoffs). Icahn now has a lot of support, so look for him to gear up for a proxy battle to overthrow Hancock if the Jan. 26 announcement from AIG isn’t a big one.
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