AIG May Be A Dog For 2016

| About: American International (AIG)

Summary

A.I.G. refuses to break up to avoid SIFI designation and ignores Carl C. Icahn.

The company had much lower returns from hedge fund investments than it had projected, coming in with dividends of only 2.36 percent instead of the estimated 8 to 10 percent.

A.I.G. faces a capital requirement increase of 10 percent for engaging in riskier activities.

The company has underperformed the S&P 500 as well as its competitors YTD.

Investors should avoid investing in AIG in 2016.

A.I.G. Ignores the Calls Made by Carl C. Icahn; Refuses to Breakup

Contrary to calls made by big investors including Carl C. Icahn, American International Group, Inc. (NYSE: AIG) announced that it will seek to streamline itself in lieu of breaking apart into several smaller companies. Mr. Icahn and other investors had pressured AIG for numerous months to divest itself of some of its lines in order to avoid designation as a systemically important financial institution, or SIFI, which comes with substantial regulatory and tax burdens. Mr. Icahn had also stated that companies that have only one line tend to show better market values and returns for their investors. While Mr. Icahn didn't respond to the announcement, it is possible he may start a proxy fight as a result of the company's decision.

Poor Hedge Fund Results Lead A.I.G. to Cut Their Bets

With around $11 billion tied up in hedge fund investments, A.I.G. has decided to reduce its investment exposure with hedge funds and instead return around $25 billion to the company's shareholders. A.I.G. had previously indicated its hedge fund investments would return an average between 8 and 10 percent per year. Instead, the return received has been a dismal 2.36 percent yield during the first nine months of 2015. A.I.G. has failed to meet its targets for profitability, leading to the call by Carl C. Icahn for the company to break apart.

Capital Requirements Also an Issue

Companies like A.I.G. that provide global insurance and that are deemed to be systemically important face an average of 10 percent capital requirement increases when engaging in riskier activities. This requirement is in place to try to prevent such companies from needing another bailout and harming the global economy as a result.

Recent Underperformance and Comparison With Competitors

For 2016 to date, A.I.G. has shown a total percentage return of -11.72, while the S&P 500
500 TR USD has showed a negative total percentage return of -7.26. By contrast, Berkshire Hathaway Inc B (NYSE:BRK.B) has demonstrated a year-to-date total percentage return of -4.57. Allianz SE ADR (OTCQX:AZSEY) has had a year-to-date total percentage return of -9.82. This shows that A.I.G. has underperformed the S&P 500 since the beginning of the year, as well as its competitors.

Recommendation: Avoid AIG

A.I.G.'s refusal to break apart into several smaller companies could lead to continued lower returns and potential problems for the company going forward. With the SIFI designation, higher tax and regulatory burden, capital requirement increases and recent poor performance, we recommend that investors avoid investing in A.I.G. at this time.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

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