Peter Hancock's plan to transform American International Group into a "leaner, more profitable and focused insurer" looks like a Hail Mary effort to buy some time from Carl Icahn, the activist shareholder who has been pounding the table to break up the company.
It might not work with Icahn, who sounds hell bent on breaking up the company and removing management. The question, however, is whether it could soothe enough of the company's other shareholders to keep Icahn from organizing a coup.
The biggest palliative on offer may be the plan to return $25 billion in capital to shareholders through dividends and share buybacks over the next two years. That is a monster program, worth more than a third of the company's market value as of Monday.
The insurer also plans to reduce operating expenses by $1.6 billion, or 14 percent of 2015's levels, within two years. It will divest its AIG Advisor Group and sell up to 19.9 percent of mortgage insurer United Guaranty Corp. as a first step toward full separation. AIG also plans to reorganize into nine modular business units, which it could potentially sell in the future.
The market seems to like, but not necessarily love, the plan. AIG shares rose about 2 percent in early trading, a remarkably small gain for such a remarkably large capital-return plan.
It's doubtful that the plan will placate Icahn because it doesn't fulfill his vision for the company to shrink enough so that it's no longer a systemically important financial institution, an issue that Hancock says is a "distraction" that isn't preventing the company from returning capital to shareholders.
Icahn's tone has become only more combative, and last week he accused management of either deliberately misleading the public or being "negligently uninformed" regarding obstacles to shrinking the company, including the value of deferred tax assets. If Hancock’s strategy update is limited to small-scale asset sales and cost-cutting, he wrote last week, “then the little credibility management now has will be lost.”
AIG also set another target to achieve a return of equity in the operating portfolio of 10.3 percent to 10.7 percent in 2017 and consolidated ROE of about 9 percent. These aren't likely to impress Icahn, who has mocked the insurer's goals in the past: “Amazingly, you have turned the quest for a 10 percent ROE into a half-decade journey,” he wrote in October.
The potential to sell off other business units may be too vague to satisfy Icahn's demands that AIG shrink enough to get out from under the higher capital levels required of systemically important financial institutions.
Additionally, undertaking an initial public offering of the mortgage insurance business is somewhat troublesome these days, given that the volatility in the stock market has put January on track to be the slowest month for IPOs since December 2008. And while the broader market hasn't exactly been a picnic in 2016, shares of mortgage insurers have been hit even harder. MGIC Investment and Radian Group -- the closest pure play peers to AIG's United Guaranty -- have each slumped about 30 percent so far this year.
Piper Jaffray's John Nadel was so turned off by what he saw in the mortgage insurance industry that he dropped his valuation for AIG's United Guaranty to no more than $3 billion to $3.5 billion, compared with an earlier estimate of $3.5 billion to $4.8 billion. Typically, when you are trying to fend off an activist, you want to maximize value for shareholders, not reduce it.
The ball is now in Icahn's court, and it's a safe bet that he'll wind up for an aggressive return shot. Since the plan doesn't seem to be elevating the stock enough to catch the attention of other shareholders, it's likely he'll have plenty of company on his side of the court.
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