American International General (NYSE:AIG) is trying to back down activist investor Carl Icahn with a "streamlining" of the insurance giant. This includes spinning off part (~20%) of its mortgage insurance business, United Guaranty Corp. - a business that generates less than 10% of pre-tax operating profits. It plans to spinoff the rest of the business later and will move ahead with the sell of its broker-dealer AIG Advisor to Lightyear Capital.
This, understandably, isn't enough to appease Icahn, where the move shows some urgency by AIG, but the move just isn't transformational. His activist hedge fund owns just over 3% of AIG and is a top five shareholder. Icahn's thesis is that AIG should split into three publicly traded companies to reduce regulatory expenses and capital requirements.
Icahn has some support for this plan, with the likes of Metlife (NYSE:MET) deciding to divest part of its US life insurance business in hopes of evading the SIFI designation. AIG could split its life insurance and property & casualty businesses to help avoid SIFI; however, AIG insists that a full blown split would impair its deferred tax benefits.
Still, a full break up is the next logical step in AIG's recently battered history. It's managed to pay back the US Treasury, sell off various assets and cut its balance sheet in half, but there's still the overhang of the $180 billion government bailout.
Hancock has to go
Icahn's battle is with AIG CEO Peter Hancock, who was brought into AIG in 2010. Hancock has a banking background with no previous insurance experience. With that, the property & casualty business has languished under Hancock. RIght now, the life insurance business is the bright spot.
Icahn looks to be calling AIG CEO Peter Hancock's bluff. Icahn is planning to put together his own list of board members, gearing up for a proxy fight.
AIG trades at just 70% of book value, but also has a return on equity of 4.5%. Something that streamlining into nine businesses can't fix. Travelers (NYSE:TRV) is generating a 14% ROE, Allstate (NYSE:ALL) is at 12%, and Progressive (NYSE:PGR) is at 18%. ROEs that AIG won't reach under the SIFI designation and without a further breakup. Right now, AIG is hoping to get ROE up to 9% by 2017.
There is the fact that AIG is looking to return some $25 billion in capital to shareholders over the next 24 months and cut costs by nearly $2 billion. They've promised further divestitures down the road. We might not have to wait that long. Icahn is getting more serious about putting further pressure on AIG to breakup fully. AiG and only two other insurers, Metlife and Prudential (NYSE:PRU), have the SIFI designation.
Something must be done, with AIG grossly underperforming peers in not just ROE terms. Its combined ratio (a measure of costs/claims versus premiums in the P&C business) is ~103%. The likes of TRV and Chubb (NYSE:CB) have combined ratios of under 90%.
In the end
I'm still on hold with AIG, waiting for a more robust plan to streamline the business before getting involved. Otherwise, I'd be interested in AIG closer to $40 a share. But look for Icahn to get even more vocal as the Feb. 13 deadline for nominating potential board members approaches.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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