In a shocking display of executive and leadership gumption, AIG did not bow down and kiss the ring of Carl Icahn and John “Puerto Rico” Paulson.
Rather than adhere to the demands of Uncle Carl to break apart its three main insurance businesses by spinning off both its mortgage and life insurance business from the property-and-casualty business and creating three separate companies, CEO Peter Hancock decided to pull the old switcharoo.
AIG Leadership’s Plan
In a feeble attempt to appease Mr. Give Me Three Seats On Your Board, Hancock and his BOD’s decided to sell off AIG Advisor Group, their broker-dealer network, to Lightyear Capital and PSP Investments. AIG will also be spinning off and IPOing 19.9% of United Guaranty, the mortgage insurance biz. As time passes, AIG will sell off the rest.
Also, Hancock decided to “return” $25 billion to all shareholders (insert Bailout and TARP thoughts) through dividends, and of course buybacks, which Jeff Macke would highly approve. Moreover, over the span of two years, there will be $1.6 billion of cost cuts, most likely in the form of trimming jobs.
Please note, all jokes and sarcasm aside, please read his piece on buybacks you’ll learn a lot; I for one did.
Lastly, and probably most confounding when you put it context to the activist’s demands, is the $67 billion market cap mega insurer is reorganizing its business reporting structure into nine divisions. Here’s the kicker… They claim it’s to “better track operational performance.”
Icahn’s Plan
I’m not going to sit here and defend Mr. Icahn, though I do enjoy how he calls out all the big shots of finance like he’s Stone Cold Steve Austin. Lord knows he’s pulled fasts ones on just about everyone involved in Wall Street (dead or alive).
However, splitting into three business units vs. nine divisional structures, some of which may become part of a legacy portfolio, (whatever the f$%k that means) makes much more practical sense to me. We like math at iBankCoin, and three seems more manageable than nine.
Icahn’s plan, and I hesitate to say this, seems much more shareholder friendly in the sense that with two spun off companies, current AIG shareholders receive something real and tangible in return, rather than some made up buyback.
With all that being said, there’s one, albeit, significant, implication and outcome of Uncle Carl’s plan that makes me side with him: the prospective elimination of the Significantly Important Financial Institution (“SIFI” or for the unwashed, ‘too big to fail’) label.
Per his October 28, 2015 letter to Hancock, Carl posits that “Each would be small enough to mitigate and avert the SIFI designation by splitting into three separate units.”
For those who are not as financially attuned, by being designated as a SIFI, you have to hold a ton of capital reserves, which decreases the amount that could be distributed to shareholders or used in capital expenditures, and lowers your return on equity, net income divided by shareholder equity. On top of that, you have tons of regulatory and compliance issues to deal with.
To add actual credence and credibility to Icahn’s plan, about two weeks ago, MetLife spun off its U.S. life insurance unit, which happens to be the America’s largest life insurer. Someone must’ve listened to Uncle Carl; will AIG?
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