Activist Icahn is calling for a breakup of insurance behemoth AIG.

Victor J. Blue/Bloomberg

Carl Icahn Has a Point About AIG

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.
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A breakup of American International Group has been a long time coming. It may now be a little closer to actually happening, and that's a good thing.

Activist investor Carl Icahn disclosed an investment in the $82 billion insurer on Wednesday and in a letter said AIG should split its insurance businesses -- property-and-casualty, mortgage and life -- into separate companies. The stock rose as much as 4.4 percent as of Wednesday afternoon.

Former AIG Chairman Harvey Golub had the same idea back in 2011, telling Bloomberg TV's Betty Liu that "longer-term, AIG shouldn't exist." Golub said it made sense to separate the bailed-out insurance colossus built by Hank Greenberg into two companies. Icahn's call for a three-way breakup takes the idea a little further. (He always was an overachiever.)

But the activist investor has a point when he says "there is no more need for procrastination" at AIG. Handling different lines of insurance under the same roof started falling out of fashion years ago.  Citigroup spun off property-casualty insurer Travelers in 2002, and then later sold the company's life insurance business to MetLife. Hartford Financial Services sold off some of its life insurance and retirement businesses after John Paulson urged a breakup in 2012.

Just like in other industries, investors want focused businesses that are easier to understand and manage. That helps explain why there were a record 243 spinoffs last year, and another 166 this year.

The truth is in the numbers. Insurers valued at more than $5 billion that focus on life policies or on property-casualty coverage trade at a median of 1.5 times the value of their underlying net assets. Multi-line insurers trade at a median of 1.2 times book value. AIG has one of the weakest multiples of any big insurer, at 0.8.

To its credit, AIG has done a lot to get itself back on track after the financial crisis, including selling more than $75 billion of assets over the last seven years, including a bevy of non-U.S. life insurance businesses and its aircraft-leasing division.

A good chunk of the proceeds from those divestitures went toward repaying the U.S. government for its bailout -- which AIG did in December 2012. That's no small feat for a company that needed as much as $182.3 billion to stabilize itself.

Earnings are improving and AIG is buying back stock, and that's reflected in the share performance. Even before Icahn's call for a breakup, AIG had been on the rise and outperforming most of its peers. And yet, it still has a long way to go to reach its full potential. 

The company's return on assets is sub-par for the property-casualty industry. Icahn argues that this is only going to get worse given AIG's ongoing designation as a systemically important financial institution.

Its stock price, at about of $63 as of Wednesday afternoon, doesn't look so hot when more than $100 is potentially on the table. That's how much billionaire investor Paulson thinks AIG could be worth if it breaks up, cuts costs and buys back stock. Or at least that's what Icahn said that Paulson said -- team work!

AIG hasn't traded for anything close to $100 since 2008. (Although admittedly, the insurer completed a 1-for-20 stock split in 2009). Activist investors can arguably be overly bullish with their estimates, but Paulson's math checks out. 

A breakup isn't going to be easy. AIG would have to distribute its debt among the different entities, figure out how to manage tax assets and may still have to hold a lot of capital.

But with those kind of potential gains to be had, a breakup has got to be worth a serious look.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net