Activist Paulson Joins Icahn’s Call to Break Up AIG

October 28, 2015 by Michael Flaherty and Richa Naidu

Activist investor Carl Icahn said he owns a “large stake” in American International Group Inc. and urged the insurer to spin off its life and mortgage units into public companies to avoid being tagged as a systemically important financial institution.

AIG’s shares shot up as much as 4 percent in heavy trading on Wednesday after Icahn released his proposal, which he said was supported by hedge fund manager John Paulson. Paulson, which owns 1.1 percent of AIG, added a quote to Icahn’s letter that said AIG can trade over $100 per share.

AIG shares rose as much as 4 percent to $63.44 in morning trading.

Icahn’s call to break up AIG into three parts puts the spotlight on a key part of the 2010 U.S. financial reform known as Dodd-Frank. The legislation mandated that all banks with more than $50 billion in assets be regulated by the Federal Reserve, and that certain non-bank entities come under the Fed’s authority as well.

The near collapse of AIG in 2008 was the driving force for Dodd-Frank’s inclusion of non-bank entities in the financial reform package, as the insurer received $182.3 billion in federal bailout money.

Four U.S. companies are labeled non-bank “Systemically Important Financial Institutions” (SIFIs) and are therefore subjected to enhanced regulation and supervision by the Fed: AIG, GE Capital, Prudential Financial and MetLife Inc.

That kind of oversight, which also entails higher capital cushions, will be tough for AIG to shed, some analysts said.

“We think a spin-off of AIG’s mortgage insurer, coupled with an aggressive cost cutting campaign, are the most likely outcomes. However, we do not see AIG avoiding SIFI status given its previous government bailout,” said Cathy Seifert from S&P Capital IQ.

The “SIFI” tag, which is applied by a group of U.S. regulators known as the Financial Stability Oversight Council (FSOC) indicates concerns that a company’s failure might imperil the financial system.

Other companies have also been eager to shed the designation, including General Electric Co., which announced this year that it was selling off large sections of GE Capital, in part to shed the hassle and costs of being a non-bank SIFI. MetLife has sued the U.S. government to protest its designation.

Icahn said in an open letter to AIG on Wednesday that the separate companies would be small enough to avoid the designation. He also said AIG should begin “much needed” cost cuts to better compete.

While AIG Chief Executive Peter Hancock said in a statement that the insurer maintains a dialog with all of its shareholders “and welcomes their feedback and ideas,” it has hired advisors to help defend against Icahn’s proposal, according a person familiar with the matter.

The activist investor, who did not disclose the size of his stake, said several large shareholders, including Paulson, were frustrated and supported a break-up of AIG. Icahn’s campaigns have forced changes at companies such as Apple Inc., eBay Inc., and Chesapeake Energy Corp.

AIG is the largest company targeted by an activist this year, Thomson Reuters data show.

“AIG is frankly overdue in following in the footsteps of all other major multi-lines in breaking up Life and P&C into separate companies,” Paulson said in a statement in Icahn’s letter.

AIG has rebounded from the financial crisis. In August it more than doubled its quarterly dividend and raised its share-repurchase target by $5 billion. But its underwriting operations have suffered from falling rates for commercial property and casualty insurance as pension funds have flooded the industry in search of yield.

AIG is trading below its book value of $79.74. Rival Prudential Financial’s book value is $92.33, and its shares traded up 2.3 percent to $82.93 on Wednesday.

Hancock, has targeted a return on equity (ROE) of 10 percent over the long-term, up from 8 percent in the second quarter – a target Icahn said would still lag its peers.

If the company spins off its life and mortgage insurance businesses, it would still have large commercial and consumer insurance operations.

Some analysts expressed doubt at the prospect of a breakup.

“It would be a mistake to think such a split could be accomplished quickly or easily considering the company’s substantial regulatory oversight and holding company obligations that are ultimately backed by the full organization,” RBC Capital Markets analyst Mark Swelle wrote in a note.

AIG is expected to report third-quarter earnings on Monday.

“We have taken important and significant steps to reposition AIG by both simplifying and de-risking the company, and realizing attractive valuations from non-core asset sales,” Hancock said in the statement.

(Editing by Savio D’Souza and Christian Plumb)

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