Is the AIG Reorganization Enough?

American International Group (NYSE: AIG) announced a major reorganization last week, but is it enough to finally push the stock above $65 a share – something the company hasn’t seen since before the 2008 financial crisis?
The AIG reorganization comes following pressure from activist investor Carl Icahn, who has been urging the company to split itself up to avoid the added regulatory scrutiny that comes with the systemically important financial institution (SIFI) designation.
Now, AIG has decided to reorganize itself into nine units. However, it’s not enough to appease Icahn, who wants the company split into three publicly traded businesses. AIG’s current plan is to spin off the mortgage insurance business, which only accounts for roughly 7% of the company’s pretax income. It will only spin out part of this business to shareholders, however, with the remainder kept by AIG.
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Icahn Pushes Back

AIG is taking a patient approach to streamlining the company, with a focus on spinning off the mortgage guaranty business, selling the broker-dealer operation and divesting other assets. Icahn doesn’t think the current reorganization plan is enough. He calls the plan inadequate and plans to assemble a group of directors for election to the AIG board in hopes of shaking up the company and potentially getting current CEO Peter Hancock ousted.
It’s worth noting that Icahn is one of AIG’s largest shareholders. He owns 3.4% of the company, making him the fifth largest shareholder. His plan to get AIG to shake the SIFI designation would reduce the insurer’s regulatory and tax burdens. More importantly, by breaking into three companies, AIG would be able to focus on its respective insurance lines. Companies that have just one line of insurance business tend to perform better than conglomerates.
Icahn also has some support, thanks to MetLife (NYSE: MET) and its recently announced plans to shake the SIFI designation. MetLife is the largest U.S. life insurer and plans to split a large portfolio of its U.S. retail business, citing the “regulatory environment” as the reason. Icahn would like to see AIG make a similar maneuver.

Streamlining the Business

AIG has one of the cheapest stocks in the insurance industry. It trades at just 70% of book value and less than 11 times next year’s earnings estimates. Meanwhile, you have Chubb (NYSE: CB), Travelers Cos. (NYSE: TRV) and Allstate (NYSE: ALL) all trading at premiums to book value.
However, AIG’s recent moves and further pressure by Icahn could help streamline the company and bring its valuation more in line with peers. AIG has other opportunities to further condense the company, which includes shedding its Valic business – a manager of retirement money for teachers.
One big positive is that AIG plans to return upward of $25 billion to shareholders over the next two years, which is a big deal for a $60 billion market cap company. Divestitures and deals are expected to help free up this capital for shareholders.
Although it doesn’t seem like much, AIG’s current plan shows initiative. And with Carl Icahn still banging on the door, there’s clearly value to be had at the company. It won’t be an easy fight, but it looks like one that could be worthwhile for shareholders.

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