
Why Carl Icahn Saw Good News in AIG's Poor Earnings
This article, originally published at 12:13 p.m. on Wednesday, Nov. 4, has been updated with market reaction.
Activist investor Carl Icahn's proposal to break up AIG (AIG) - Get Report , the insurer whose brand was tarnished by a massive financial crisis bailout, may garner more support from his fellow stockholders after dismal quarterly earnings.
Just a week after Icahn unveiled what he called a "large stake" in AIG via Twitter -- quipping that it had become "too big to succeed" since the 2008 financial crisis -- the insurance giant missed Wall Street earnings estimates by 49%. The New York-based company said lackluster returns on investments in hedge funds and a sharp decline in underwriting income were mostly to blame.
Icahn has suggested that AIG bolster its performance by separating its life and mortgage insurance businesses from its property and casualty unit, creating three smaller, more easily managed firms.
Each of the resulting businesses, he said, would be small enough to avoid the Systemically Important Financial Institution (SIFI) designation that has increased regulatory oversight of AIG and limited how it invests capital.
Proposals to break up AIG "are certainly plans worth exploring" if they can help the insurer shed its SIFI designation and return money to investors, Nomura analyst Clifford Gallant said in a note to clients.
The SIFI label was created in the wake of the financial crisis, when AIG received $182 billion in federal assistance, as regulators attempted to avoid a repeat by curbing excessive risk-taking at companies so large their collapse would threaten the broader economy.
"AIG has a great global franchise," Gallant noted, but "the company's operating performance is below its potential."
AIG also needs to cut costs to better compete with peers such as The Hartford Group (HIG) - Get Report , Berkshire Hathaway (BRK.A) - Get Report , and Metlife (MET) - Get Report , Icahn said.
Activist investors have been increasingly pressuring U.S. corporations to return value to shareholders, and the recent decision of fast-food corporation Yum! Brands to split off its flagging operations in China shows the effectiveness of trimming operations to their essential components, said Ivan Feinseth, an analyst with Tigress Financial Partners.
"Based on the growing level of activism, more activist investors are beginning to be more welcomed," Feinseth said in a telephone interview. "I expect this to happen much more."
Icahn said last month in a in a public letter to AIG CEO Peter Hancock that he has spoken with several large shareholders frustrated by what he called a lack of clear progress who want to see the company broken up. "I cannot fathom how you could ignore repeated requests from shareholders to execute a plan that would release billions of dollars of capital," he said.
Hancock, however, said on an earnings call with analysts this week that AIG has reviewed separating its life insurance business from property and casualty operations in the past and concluded that doing so "did not make financial sense." He said executives would meet with with Icahn to share those findings and seek more information on his proposals.
"AIG has been aggressively reshaping the company and has sold over 30 businesses for over $90 billion," the CEO added. "There are no sacred cows. And we consider all avenues to improve shareholder returns."
AIG management has outlined its own plan to redefine the company with measures including trimming expenses about $1.5 billion by the end of 2017 through a mix of job cuts, service consolidation and technology upgrades.
The insurer plans to cut about 20% of its senior management positions and take advantage of low interest rates to reduce its debt. It has returned about $9 billion to shareholders so far this year through stock buybacks and dividend payments.
"To be clear, we're targeting net expense reductions," Hancock said. "We've been investing, and we'll continue to make investments that will give us a competitive advantage in an ever changing landscape."
AIG has gained 8.6% this year, outperforming both the Standard & Poor's 500 and the S&P Financials Index. Still, the shares have dropped 4.6% to $60.80 since Tuesday's earnings report.
In the three months through September, AIG reported after-tax income of 52 cents a share, trailing the average estimate of $1.03 in a Bloomberg survey. Including restructuring costs, charges for debt payoffs and capital losses and other expenses, the company posted a net loss of $231 million, or 18 cents a share, compared with profit of $2.2 billion, or $1.52 a share, a year earlier.
Income from insurance businesses dropped 41% to $1.47 billion, with consumer businesses such as retirement, life, and personal policies the most glaring under-performers, falling 48% from last year to $657 million. Commercial income declined 34% to $815 million.
"AIG's main problem is solving the riddle of getting the underwriting performance right in a very tough market with well-run competitors," Nomura's Gallant said.








