AIG's No-Fire-Sale Ethos Clashes With Icahn's Time-to-Act PushBy
Hancock pursues Benmosche strategy of not racing into deals
Stock may be hit hard without big news Jan. 26, Haines Says
Under pressure in 2009 to repay the insurer’s bailout, company executives were in a race to sell assets. Then Robert Benmosche applied the brakes when he took over as chief executive officer, demanding better prices on everything from an aircraft unit to derivative contracts. He eventually handed the U.S. government a $22.7 billion profit.
His successor, Peter Hancock, has been charting a similar path as he seeks to avoid being perceived as a forced seller while simplifying the insurer. He scheduled a Jan. 26 presentation to outline his approach after rebuffing investor Carl Icahn’s demand to break AIG into three companies. Any appeal by Hancock for patience could frustrate the billionaire activist, who said in October that “the time to act is now” and then wrote Tuesday that the CEO’s credibility will suffer unless he announces a drastic strategy shift.
After AIG dealt with the U.S. government as a majority shareholder in the financial crisis, the tension with Icahn and billionaire investor John Paulson “is something that pales in comparison,” Robert Haines, an analyst at CreditSights, said in an interview. “It’s not live-or-die like it was back then, but they have to be cognizant of what shareholders want. He has to say something, or the stock’s going to get hit really bad.”
Hancock, 57, can point to the exit of an investment in AerCap Holdings NV and the sale of shares in companies like Springleaf Holdings Inc. and China’s PICC Property & Casualty Co. Those deals helped fund more than $9.5 billion of share buybacks last year, and AIG has beaten the Standard & Poor’s 500 Index since he took over in September 2014.
The CEO has also sold some small units, including operations in Central America and Taiwan. But those deals were dwarfed by rival MetLife Inc.’s announcement last week that it will sell, spin off or have an initial public offering for a U.S. retail business with $240 billion in assets. A spinoff of AIG’s life and retirement consumer business would have operating earnings of about $2.2 billion, Bloomberg Intelligence said in a note Wednesday. That would be bigger than MetLife’s plan, according to the report.
MetLife, which has been designated by a U.S. panel as a systemically important financial institution, said the move could limit capital requirements on products like variable annuities. Hancock has said the benefits of shedding SIFI status aren’t such a big deal, and that splitting could erode the value of tax assets and jeopardize AIG’s credit rating. Moody’s Investors Service said last week that MetLife is being reviewed for a downgrade.
“I’m not a believer that there’s a wholesale dismantling of AIG coming,” Charles Sebaski, an analyst at BMO Capital Markets, said in an interview. “I don’t expect asset sales like what we’ve seen before,” when AIG shrunk by half from the financial crisis through 2013.
AIG learned hard lessons back then that raising cash isn’t always as simple as investors would like. One would-be buyer for the International Lease Finance Corp. plane unit was unable to deliver the funds after agreeing to a deal. Other deals for units in Asia stalled or collapsed.
Benmosche insisted on demanding what he saw as the right price, even if it meant slowing down divestitures at a time when the government was eager to shrink New York-based AIG. He said in 2009 that patience in exiting derivative positions would protect the insurer.
Goldman’s Bonus Pool
“My biggest concern is you’re selling too fast and you’re being taken by Wall Street,” he told staff. “I don’t want to feed Goldman Sachs’s bonus pool anymore,” he said. “I want to feed ours. In order to do that, you’ve got to stop giving this stuff away. You’ve got to ask for decent prices or we’ll wait.”
Benmosche halted the auction of a U.S. investment advisory unit his first month on the job and refused to lower the takeover price when shareholders of Prudential Plcdeclined to support that company’s bid of about $35 billion for AIA Group Ltd., a Hong Kong-based insurer. Benmosche eventually raised a similar sum by exiting AIA through four public offerings. He died last year.
Hancock, who was hired by Benmosche in 2010, spoke in his first months as CEO about not being hurried into deals, even for non-core assets like the AerCap stake that AIG acquired when that aircraft-leasing company agreed to buy ILFC.
“It would seem like a hot potato,” Hancock said in February of the AerCap stake, when the Netherlands-based company was trading for about $43 a share. “I would not describe it that way.”
AIG raised more than $3 billion by selling most of its AerCap shares in June at $49 apiece. The aircraft-lessor’s shares have since plunged to less than $33.
Still, Paulson would like AIG to trim down more dramatically, according to people with knowledge of the hedge-fund manager’s thinking in November. That could involve selling life insurers and a mortgage guarantee operation to focus on property-casualty coverage, an approach that Icahn endorsed in Tuesday’s letter. And Icahn has said he may seek the addition of a director who could replace Hancock as CEO if asked to do so by the board.
Hancock told staff in a letter last week that management has a “prudent, insightful plan” to address shareholder concerns and that employees will “continue to hear more noise in the next few days.” Jon Diat, a spokesman for AIG, declined to comment on the activist’s plan to break up the company. Icahn didn’t return a message.
Many investors could be pleased at the presentation by a two- to three-year timetable to exit SIFI status, a strategy to fix P&C operations and a plan to sell 20 percent or more of the businesses, Josh Stirling, an analyst with Sanford C. Bernstein & Co. said by phone.
“Some investors just aren’t going to be satisfied,” CreditSights’ Haines said. “I just don’t think an actual split is in the cards right now. That could be several years down the road.”
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