Sources have reported that American International Group, Inc. AIG is mulling over selling blocks of its life insurance policies. This move is being considered by the company’s CEO Peter Hancock to increase returns as the company is under immense pressure from the fifth biggest shareholder in the company – Carl Icahn.
Since last month, Icahn has been urging Hancock to split up the mammoth company with diverse businesses into three sub parts – property and casualty, life and mortgage insurance.
Icahn, in his letters addressed to the CEO, straightaway asked to carve out the company into simpler parts which will save it from regulatory pressure and at the same time make its business manageable. He also threatened to oust the CEO and replace him, if the situation demands.
Hancock, however, doesn’t seem convinced with the idea of a split up in which he does not see much financial sense. Instead, the AIG chief promised to take steps that will lead to higher returns.
Hancock is, therefore, under tremendous pressure, and the reports of the selling of life blocks of business is a move in this direction.
Will Icahn be Appeased?
It remains to be seen whether Icahn, who is unwilling to wait longer for slow responses from the company, will be satisfied with this move. He rather wants to speed up the process of unlocking massive value tied within this great company.
AIG, the largest global insurer (based on shareholders’ equity), serves customers in over a hundred countries and jurisdictions through its three distinct business lines. But interestingly, AIG’s enviable business diversity and colossal size are the villains in its own growth story, as per Carl Icahn.
The iconic investor pointed out in his letter that the company is “too big to succeed” and that it widely lags its peers in terms of generating returns for its shareholders due to constrains such as size and capital. The company faces stringent capital restriction that hampers its competitiveness. He also blamed the lower return on AIG’s lack of expense management. Icahn lashed out on AIG’s management, which estimates an increase in returns of not more than 0.5% per year. Now, that would translate into returns of 10% in 50 years!
What Led to This Dismal State?
Back in 2008, AIG was hit by the subprime mortgage crisis because of its huge bets on subprime-mortgage securities which soured when the housing market crumbled. That year, AIG reported the biggest quarterly loss in the U.S. corporate history, verging on a collapse. It was then that the government took control over the company by bailing it out with $85 billion loan funds. Since then, the company suffered losses until 2014, when it finally crawled back to profits.
As a recipient of bailout money, AIG was subjected to significant government intervention including restrictions on its administrative and operational policies. Despite the complete sale of the Treasury’s stake, risk of other fresh regulatory challenges arose, as AIG was designated a non-bank systemically important financial institution (SIFI) status in Jul 2013. The company is now under the supervision of the board of governors of the Federal Reserve System.
Icahn in his first letter also said that AIG has been repeatedly suggested by regulators and the Congress to reduce its size. Yet management turned a deaf ear, perhaps, only to show progress at a snail’s pace on this front. Though AIG has done its bit to reconstruct itself after the financial crisis by divesting more than $75 billion of assets since 2009, including a range of non-U.S. life insurance businesses plus the aircraft-leasing division, Icahn views the development as slow.
The indolence has eroded the company’s stock price, which trades below its book value. Moreover, since almost all the proceeds from divestitures went toward repaying the government loan, the company could not invest in its own business. Of course, asset disposals have liberated AIG from severe debt, but it also shrunk its portfolio and global market share, making it vulnerable to cutthroat competition from its peers.
Zacks Rank & Other Stocks
AIG carries a Zacks Rank #5 (Strong Sell). Some better-ranked stocks are Old Republic International Corporation ORI, Assured Guaranty Ltd. AGO and FBL Financial Group Inc. FFG. While Old Republic sports a Zacks Rank #1 (Strong Buy), Assured Guaranty and FBL Financial carry a Zacks Rank #2 (Buy).
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