The big question investors in American International Group had on Tuesday was how hard CEO Peter Hancock would push back at Carl Icahn's demand to break the company into three, or whether he might even suggest he's open to the idea.
They got the answer immediately at the start of the company's earnings conference call: Hancock came out swinging in his opening remarks, saying the proposal to separate the mortgage, life and property-and-casualty insurance businesses doesn't make sense. He said that designation as a systemically important financial institution, or SIFI, hasn't hurt the company's ability to return capital to shareholders and that less cash would be available for future distributions if the company were divided. Furthermore, he said, it would eliminate about one-third of the company's deferred tax assets, increase certain costs and distract from the company's cost-cutting initiatives.
Hancock may have some valid arguments, and he ultimately may win this fight to protect his empire, but that may not be the best for shareholders given the company's recent history. In fact, breaking up the company could be what AIG needs to finally shed the taint of the financial crisis.
Hancock did obtain some ammunition to help his case on Monday. Removing the SIFI designation, and the potential increased capital requirements that come with it, is one of the main reasons Icahn gave in pushing for a separation. Moody's said on Monday that breaking up AIG would be negative to its credit ratings, in part because it would remove the benefit of having a diversified line of business. In Hancock's view, it's the ratings agencies and not regulators who are mainly responsible for limiting how much cash the company returns to shareholders. AIG anticipated the SIFI-type of designation while it was still in the government's "cradle," he said, and thus aggressively deleveraged and divested business units in preparation, so it does not need to shrink itself drastically to comply.
Also bolstering Hancock's case is that AIG shares aren't doing too shabby this year. They're up more than 8 percent in 2015, four times the gain of an index of insurers in the S&P 500. Granted, they received even more of a boost last week when Icahn announced his plan, only to give those gains back after the conference call on Tuesday.
The conference call was like the prefight weigh-in for a potential heavyweight bout between AIG management and Icahn, should he decide that he's up for the fight. Icahn reportedly only owns about 2 percent of AIG. Paulson & Co. owns about 1.2 percent, according to the most recent regulatory filing, and Icahn's letter indicates John Paulson supports a breakup that he thinks could send the shares up by about two-thirds, to $100 a share. They'll need some more support. BlackRock and Vanguard, which tend to side with management in proxy fights, own almost 13 percent between them.
Icahn, if history is any guide, relishes this type of fight. And he is enjoying even more media attention than usual. As an ally of Donald Trump, his skill in the "art of the deal" is often invoked on the campaign trail, and his association with the candidate means the big-media cameras and reporters are ready and waiting whenever he chooses to utilize them.
His solution is intriguing because it is potentially attractive to both shareholders and regulators. It gives investors three smaller companies to own without as heavy a burden of regulatory scrutiny and higher capital constraints. It also breaks up a too-big-to-fail firm that already failed once spectacularly.
Investors just don't seem comfortable with systemically important banks and insurance companies. AIG trades for only about 80 percent of book value, or its assets minus liabilities. Prudential Financial and Metlife, which also have SIFI status, trade for less than book value as well.
So AIG may not be the only one fighting this fight in coming months. AIG, however, is the firm that hasn't quite shaken off the stink of the financial crisis. Icahn's proposal may be its best chance to do just that.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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