Amid mounting pressure from investor Carl Icahn, chief executive officer (CEO) Peter Hancock of American International Group, Inc. AIG announced a new share buyback. Per the announcement, the company will repurchase additional shares with an aggregate purchase price of up to $3.0 billion.
This additional authorization will enable AIG to act upon one of its strategic priorities which is to return excess capital to shareholders. This will also boost the company’s bottom line.
Last week, the company announced a new Executive Leadership Team structure, comprising 10 heads – all veterans in their respective fields – to work toward attaining the strategic priorities of the company. The company also announced slashing of several jobs, including those at senior positions.
Prior to this, sources reported that AIG is mulling over the sale of blocks of life insurance policies, in order to focus on more profitable avenues of growth.
Hancock, who is under immense pressure from the company's fifth largest shareholder Carl Icahn, is hopeful that all these measures will increase returns from the company.
In the latest letters addressed to Hancock, Icahn warned that the former could be ousted if he remains unsuccessful in speeding up the process of generating returns from the company. Icahn in his first letter had urged Hancock to split up the mammoth company with diverse businesses into three sub parts – property and casualty, life, and mortgage insurance.
This would save AIG from regulatory pressure and at the same time, make its business manageable.
Hancock, however, doesn’t seem convinced with the idea of a split-up as he does not see much financial sense in it. To work a way out, the AIG CEO had instead promised to take steps that will lead to higher returns.
Will This Move Calm Icahn?
It remains to be seen whether Icahn, who is unwilling to wait any further for slow responses from the company, will be satisfied with these moves. He, in fact, 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 considerably lags its peers in terms of generating returns for its shareholders. Constraints such as size and capital are the primary culprits. The company faces stringent capital restriction that hampers its competitiveness. He also held AIG’s inadequate expense management responsible. Icahn lashed out at 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 had 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 swung 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 a slow one.
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 has also shrunk its portfolio and global market share, making it vulnerable to cutthroat competition from its peers.
Zacks Rank & Other Stocks
AIG presently 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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