Investors tend to shy away from taking on shares in one-stop-shops. After all, it’s generally far safer to place your faith in a meticulously focused business that’s simple to understand and easier to manage. That’s why the banking and insurance sectors have seen a record number of spinoffs over the past couple of years – and it’s also why infamously active investor Carl Icahn (Trades, Portfolio) has called for a breakup of American International Group (AIG, Financial).
Last week, Icahn delivered a scathing open letter to AIG’s CEO, Peter Hancock, in which he argued that AIG is simply "too big to succeed." According to Icahn, the $82 billion insurer’s status as a Systemically Important Financial Institution (SIFI) has created an “increasingly onerous regulatory burden” that is ultimately restricting the company’s overall potential. Consequently, Icahn would see AIG split its three primary businesses into separate companies: property and casualty, mortgage and life. Peter Hancock wasn’t necessarily pleased by Icahn’s letter, but the news did lift shares by 4.4% on Wednesday.
So, is Carl Icahn (Trades, Portfolio) right about AIG? Empirical evidence certainly suggests so. Whether the company can (or would) deliver is another matter entirely.
Now, AIG has done a lot of work to pick itself up. Since 2008, it’s sold over $75 billion in assets (including overseas life insurance businesses) in an effort to repay the U.S. government for its colossal bailout and return to growth. When trading closed on Friday, shares in AIG were hovering at $63.07 – a full 17.86% rise year over year. At the end of last week, analysts reckoned the stock had a price target of $68.39 in anticipation of Monday night’s Q3 earnings report.
Long story short: things are definitely looking up at AIG. Yet nobody (including Carl Icahn (Trades, Portfolio)) will challenge that. The challenge is whether things could be going even better. Billionaire fund manager John Paulson (Trades, Portfolio) has been quoted as saying he thinks AIG should be trading at more than $100 per share – and would be post haste if it were willing cut loose a few of its businesses. As a point of reference, AIG hasn’t traded at anywhere near $100 since before the recession.
It’s also worth pointing out that AIG is generally underperforming when compared to its competitors. According to analysts, insurers valued at more than $5 billion should generally be trading at around 1.5 times the value of their underlying net assets. AIG is currently hovering at 0.8 its book value, which is one of the weakest multiples in the industry. Why? A lot of it might have to do with size.
Over the past few years, a lot of insurance giants have stopped handling different business types under the same roof in order to make things easier for investors. Citigroup (C, Financial) spun off its property-casualty business more than a decade ago, while Hartford Financial (HIG, Financial) got rid of its retirement business in 2012 (following demands for a breakup from Paulson, incidentally). Both firms would go on to give up on their life insurance businesses, too. It makes sense. In spinning off businesses that tend to overcomplicate a company’s overall corporate strategy, both firms have gone on to do pretty well. Citigroup’s share prices have risen substantially since those sales – while shares in Hartford Financial, despite a recent downturn, have more than tripled.
All signs point to Icahn being spot on: AIG is probably worth more broken up. At least, the company could unlock a lot more value following a split. Yet the company’s SIFI status very well may prevent shareholders from seeing that dream come to fruition; after all, regulators hate to relinquish control over powerful companies. General Electric (GE, Financial) has been trying to shed its SIFI status for almost two years now to no avail.
Bearing that in mind, it’s difficult to see how Icahn’s proposed breakup could possibly go down in the mid-term. AIG could spin off a few more businesses, sure. But that regulatory burden Icahn claims is hampering the company might be pretty difficult to lose.
At the end of the day, Peter Hancock and Carl Icahn (Trades, Portfolio) have got quite a bit of soul-searching to do. AIG is certainly capable of more than it’s been achieving and very well could be worth less than the sum of its parts. Unfortunately, a lot of this hinges on AIG's Q3 results, which are set to be published Monday night. Win or lose, Hancock will have a whole lot of big questions heading his way on Tuesday’s investor call.
