Billionaire investor Carl Icahn has a new target in his sights: American International Group, Inc. (NYSE:AIG). AIG stock is up 11.91%, but its history during the 2008 financial crisis is nearly as notorious as Carl Icahn himself. Between them, Icahn and AIG stock make for an odd, but interesting couple.
Icahn sent a letter to Peter Hancock, the CEO of AIG, which is where the story begins. In his letter, Icahn admits he’s been buying up a ton of AIG stock. He now has a massive stake in AIG stock-enough for him to feel comfortable making demands.
Icahn’s message is simple: split AIG stock into three parts. This may seem like a crazy idea at first glance, but that’s why Carl Icahn is a billionaire. He’s willing to be brutally honest with powerful people and hold unpopular opinions that he thinks are right.
“[AIG stock] continues to severely underperform its peers and is now facing an increasingly onerous regulatory burden which will only further erode its competitive position,” said Icahn. “It is a “no-brainer” that the simple act of splitting [AIG stock] up will greatly enhance shareholder value.” (Source: “Letter to AIG CEO,” Carl Icahn website, October 28, 2015.)
If you think it’s obnoxious for a single AIG stock investor to make demands, well, you obviously don’t know Carl Icahn. This is what he does; he lines up a stock he thinks is ripe for a turnaround (in this case AIG stock) and amasses a sizeable stake in the firm.
AIG Stock Gets the Carl Icahn Bump
Carl Icahn doesn’t need to buy a majority of AIG stock—just enough to be taken seriously. Some call Icahn a corporate raider, but to me he’s just a guy who gets things done. AIG stock is up 12.02% this year. Clearly Carl Icahn thinks there’s more room for AIG stock to run.
Almost automatically, AIG stock got a lift from Icahn’s billionaire status. Up more than 3.5% in the morning trading hours, AIG stock is already showing more signs of life. The market seems to like what Icahn is selling.
The proposal for splitting AIG stock makes sense the more you look at it. Icahn argues AIG should spin off life and mortgage insurance companies into separate entities, thus separating AIG stock into three parts.
By doing so, AIG would avoid the label of “systemically important financial institution,” or SIFI, that comes with a bundle of extra regulations. AIG stock doesn’t benefit in any way by keeping its life and property and casualty insurance under the same banner.
“Enhanced regulation is intended to be a tax on size,” said Icahn. “If nothing is done, returns and [AIG stock]’s competitive position will continue to suffer as the SIFI regulation, including its costs and capital requirements, is fully implemented.”
Icahn Aims to Improve AIG Stock Returns
One point that Carl Icahn hammered constantly was return on equity, or ROE. In his letter to the man in charge of AIG stock, Icahn was aggressive about AIG stock’s subpar performance, particularly about its ROE.
AIG stock was underperforming its peers on the ROE front, and Icahn takes that as AIG’s cardinal sin. When the situation can be fixed so easily, as in the case of AIG stock, Carl Icahn isn’t one to mince words. Inefficiency is something he can’t stomach.
“AIG’s ROE is below its peers not only because of size and capital constraints, but also because of lack of cost control,” said Icahn. “You must be proactive and commit to closing 100% of the ROE gap between [AIG stock] and its peers.”
Peter Hancock, the CEO of AIG, had promised a 10% ROE from AIG stock, but he hasn’t specified when. Then he went on to commit AIG stock to a 0.5% improvement on ROE every year. Carl Icahn called him out on it by saying, “Amazingly you have turned the quest for a 10% ROE into a half decade journey.”