Activists Icahn, Paulson Land Seats on AIG Board; Now What?

John Paulson and Carl Icahn, who became billionaires by identifying mispriced securities and pushing for corporate shakeups, face a new challenge after winning seats on the board of American International Group Inc., the insurer that’s been too big to manage for more than a decade.

Paulson was nominated to be a director along with Samuel Merksamer of Icahn Capital, the insurer said Thursday after markets closed. As if to highlight the task ahead, the New York- based company simultaneously announced a fourth-quarter loss of more than $1.8 billion, driven by higher-than-expected claims costs at the property/casualty operation, the business that Icahn and Paulson’s firm have said should be the core of a scaled-back AIG.

“Their job is to keep the pressure on,” Robert Haines, an analyst at CreditSights, said in an e-mail. “They have an uphill battle, but every time AIG stumbles, their argument gets stronger.”

The additions to the board mark a reversal for AIG after Chief Executive Officer Peter Hancock rebuffed Icahn’s demands to break the firm into three companies, one offering property/casualty coverage, another providing life insurance and a third backing mortgages. Hancock said a split could hurt the company’s credit rating and jeopardize tax assets. The CEO also had dismissed Icahn’s insistence that there could be substantial benefits in avoiding the regulation that comes with AIG’s designation as a systemically important financial institution, or SIFI.

Now, Hancock “has to listen to them,” Haines said. “These guys are not just some outsiders. They are part of the actual company.”

Hancock is a former J.P. Morgan & Co. and KeyCorp. banker who joined AIG in 2010. In September 2014, he became the insurer’s sixth CEO since 2005. He has already shaken up management twice to simplify operations, boost returns and narrow the company’s focus. Still, he’s been unable to meet his own target of a 10 percent return on equity.

Hancock wasn’t quoted in AIG’s statement about expanding the board to 16 members from 14. Rather, there was a comment from Chairman Doug Steenland praising Paulson and Merksamer.

The accord allows AIG to pursue Hancock’s turnaround plan without being distracted by the threat of a proxy fight until next year, according to people familiar with the arrangement. The deal includes a non-disparagement agreement. Jon Diat, a spokesman for AIG, declined to comment, as did a representative for Paulson. Icahn didn’t respond to a message.

“Rather than having the activist shareholders lob accusations from the outside, let them in the door,” said Charles Sebaski, an analyst at BMO Capital Markets. “Let them see this is the reality of what’s going on, at least to the best of the knowledge of the management team.”

Icahn has more than 40 million shares, a stake of about 3.4 percent, according to data compiled by Bloomberg. Paulson’s hedge fund firm has more than 14 million shares.

“Splitting up the company is harder than it looks,” said Meyer Shields, an analyst at Keefe, Bruyette & Woods. “The real path to value creation is by finding and shuttering the businesses where AIG produces dreadful results” and new directors will help, he said.

AIG advanced 1.7 percent to $51.36 in extended trading at 6:26 p.m. in New York. The insurer had dropped 18 percent this year through 4 p.m. AIG announced the board nominations after the close of regular trading.

While Paulson is best known for building a fortune in the financial crisis with bets against subprime mortgages, his hedge fund firm has also helped turn around insurers including CNO Financial Group Inc. and mortgage guarantor Radian Group Inc.

He demanded in 2012 that Hartford Financial Services Group Inc. break into separate companies. While Hartford’s then-CEO Liam McGee didn’t go as far as Paulson initially demanded, he did sell major units and eventually won praise from the hedge fund manager.

Icahn, 79, started a securities firm in 1968 with the help of money from an uncle, and within two decades was one of the world’s most famous corporate raiders. He has rebranded as an activist investor, positioning himself as an outsider who fights tyrannical and inefficient managers.

In the past two years, Icahn has started at least 10 notable activist campaigns, according to data compiled by Bloomberg. With the AIG detente, he’s reached settlement agreements in nine, with seven resulting in board seats.

Icahn said in a separate statement that he declined to join AIG’s board because of other time commitments. He made no mention of Hancock, a contrast with his endorsement of Xerox Corp. when the tech giant agreed to split into two companies and Icahn said, “We applaud Ursula Burns,” the CEO of the Norwalk, Connecticut-based company.

Still, his remarks stood out for a friendlier tone toward AIG.

“We commend the board for adopting a number of our recommendations over the last few months,” Icahn said. “We continue to believe that smaller and simpler is better and look forward to working collaboratively with the board and management to help catalyze a turnaround in core P&C operations, a more transparent operating structure, and the ultimate shedding of the SIFI designation.”

AIG was built into the world’s largest insurer by Maurice “Hank” Greenberg, and each of the men who held the CEO post since his 2005 departure has grappled with the firm’s complexity. The company shrank by half as AIG sold assets to repay a 2008 bailout, and Hancock narrowed the focus further after taking over in late 2014.

Hancock said in a presentation last month that he plans to return $25 billion to shareholders over two years, partly with funds from divestitures and risk-transferring reinsurance deals. He announced a $5 billion stock buyback Thursday as part of that plan and said that that AIG was increasing its quarterly dividend 14 percent to 32 cents a share.

Still, he couldn’t avoid some nasty surprises for investors, like the reserve shortfall that fueled the loss in the three months ended Dec. 31. And while AIG wasn’t the only major insurer prone to such mishaps — Zurich Insurance Group AG recently replaced its CEO after losses forced the company to abandon a takeover bid for RSA Insurance Group Plc — Hancock has been unable to match returns of companies like Chubb Ltd. or Travelers Cos.

“There’s not a lot to cheer about in fourth-quarter results,” David Havens, an analyst at Imperial Capital, said in a note. But bringing the investors into the boardroom could limit public sniping and force them to work out their differences of opinion with the company, he said. “That should be helpful.

–With assistance from Max Abelson, Beth Jinks, Lily Katz and Michael Thieme.