The stakes couldn't have been higher for American International Group, Inc. (NYSE:AIG). The insurance company is under activist siege from Carl Icahn, but has so far resisted to give in to his demands to break up the company and adopt an action plan to de-SIFI. Icahn has fired off a warning to American International Group's management last week, in which he made it clear that he expects the company to pursue a bold plan in order to boost profits.
In his letter to AIG's Board of Directors, Icahn argued that a half-hearted attempt to turn the insurance company around would lead to a loss of "credibility". The letter was widely understood as a warning to management to get things in order fast.
AIG's chief executive officer Peter Hancock has been under fire from Icahn for the last couple of months, and his job hinged on a proposal that could find the support of a majority of shareholders. AIG presented its strategic update yesterday, and suffice it to say, Icahn will not be amused.
Based on its strategic update, American International Group strives to boost shareholder value in three ways:
- It plans to return $25 billion of capital to shareholders over the next two years;
- AIG targets a $1.6 billion operating expense reduction, also within the next two years;
- It will sell AIG Advisor Group to Lightyear Capital LLC and PSP Investments AND sell up to 19.9% of United Guaranty, AIG's mortgage insurance business, in an IPO this year.
The action plan might have been a well-meaning attempt to satisfy shareholders, but it was far from being a bold move required to turn the insurance company around, especially when it comes to AIG's flailing property casualty business. American International Group's plan to return $25 billion in capital is praiseworthy, but will do nothing to address the problem of poor ROEs.
The strategic update is without a doubt not the big move that would have been necessary to woo big investors like Icahn. Therefore, it can be expected that Icahn is going to crank it up a notch over the short haul and increase the pressure on the company's Board of Directors. Since Icahn will be terribly dissatisfied with AIG's reform proposal, Chief Executive Officer Peter Hancock will feel Icahn's wrath sooner rather than later.
American International Group had the opportunity yesterday to bring investors on board and lay out concrete steps of how the insurance company could be put into better shape. It has failed to meet those expectations. The plan to return $25 billion of capital to shareholders, reduce operating expenses, and sell a few smaller assets falls far short of what would be required to turn the ship around. Icahn will not be amused by management's reluctance to address the big issues that keep AIG's stock price down. Moving forward, investors can expect a more heated exchange between Icahn and AIG's management while Icahn may try to replace the CEO.
Disclosure: I am/we are long AIG.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.