Quarterly loss, Icahn keep things roiling at AIG

Whether a radical plan proposed by investor Carl Icahn to split AIG into three parts becomes a reality remains to be seen./ AP

American International Group Inc. has undergone many changes in the seven years since its near-collapse and, one way or another, it's about endure some more.

Whether that will include a radical plan proposed by investor Carl Icahn to split the company into three parts remains to be seen, but another management shake-up is certain as the insurer announced plans to lay off nearly one-quarter of its senior managers last week.

While observers are divided on whether Mr. Icahn's plan makes sense, there is a consensus that high expenses remain an issue for AIG.

Mr. Icahn's call to break AIG into three pieces — property/casualty, life and mortgage insurance — came a few days before it reported disappointing third-quarter results.

In an open letter to AIG President and CEO Peter Hancock, Mr. Icahn said that splitting the company up would enhance shareholder value and result in three companies each small enough to avoid AIG's current designation as a “systemically important financial institution.”

“We believe there is no more need for procrastination, the time to act is now,” Mr. Icahn wrote, adding that he had heard from other shareholders who support a breakup.

AIG is one of three U.S. insurers — the others being MetLife Inc. and Prudential Financial Inc. — designated a SIFI by the Financial Stability Oversight Council, which means AIG is subject to heightened federal oversight and increased capital requirements. The introduction of the SIFI designation was one of several financial risk management steps regulators took after the collapse of Lehman Bros. and the federal bailout of AIG during the 2008 financial crisis.

In addition, Mr. Icahn called on AIG to immediately embark on a “much needed cost control program to close the gap with peers.”

Mr. Hancock rejected the idea that AIG should split up during an earnings conference call last week. He said that AIG management and directors had examined the issue and “concluded that it did not make financial sense.”

He also announced that AIG — which posted a $231 million loss in the third quarter — planned to cut 23% of its 1,400 top management jobs and that further job reductions could be expected in 2016.

Messrs. Icahn and Hancock met privately last Thursday to discuss the breakup issue.

A spokesman for AIG confirmed that the meeting had occurred as planned. “AIG welcomes feedback from our shareholders and engages in active, ongoing dialogue,” said the spokesman in an email. “However, we will not discuss specific conversations we have with Mr. Icahn or other shareholders.”

Market observers are split over whether dismembering AIG would have positive results.

“There's certainly a good case to do it,” said Cliff Gallant, an analyst with Nomura Securities International Inc. in San Francisco. “The idea that you'd have more focus makes sense.”

He said that while he didn't know how much the SIFI designation is costing AIG for matters such as compliance, “I think it's a lot.”

If the company broke up, “there's talk there would be capital freed up — I think it's certainly worth exploring,” he said.

Paul Newsome, managing director at Sandler O'Neill & Partners L.C. in Chicago, said he was not “terribly surprised” at Mr. Hancock's reaction to Mr. Icahn's call for a split. “They had to say, "We don't think it's a good idea at this time.'”

“I think it's a good idea to split up,” Mr. Newsome said. “The biggest issue is it's pretty tough to run a life and property/casualty company together. They require a different mindset and a different way of looking at the business.”

Mark Dwelle, an analyst at RBC Capital Markets L.L.C. in Richmond, Virginia, took a different view.

Whether breaking up would ever be the best option, “I think that AIG makes a compelling case that ... now is not the right time,” he said.

Moody's Investors Service Inc. also viewed Mr. Icahn"s proposal negatively.

“A breakup of AIG and loss of SIFI status (assuming this were the effect) would be credit negative for the company, removing the diversification benefit of the multiline insurance operations and the capital and risk management oversight that the U.S. Federal Reserve applies to nonbank SIFIs.”

But if there's division over the future shape of AIG, analysts agree that taking steps, even drastic ones, to bring costs into line with those of its peers has to be part of AIG's business strategy, of which the announced layoffs may only be the first step.

“There is an assortment of problems, but addressing expenses and working on margin improvement is definitely the first step in the right direction,” said Mr. Dwelle.

“The business as a whole is a shadow of its former size,” he said. “The recent focus has not necessarily been on headcount but on redesigning business systems and risk management systems. The fact that they're ready to look at the overall headcount seems to reflect that they have an improved sense of what businesses are important and want to align the headcount with that vision.”

James Auden, managing director of insurance at Fitch Ratings Inc. in Chicago, stressed that AIG's expense ratio is “definitely higher than their peers” and that labor costs play a considerable role in that.

“They've invested in the business a lot recently — in systems, technology and predictive modeling,” he said. “Automation may not necessitate needing all of those people.

“They have been conducting some expense reduction initiatives, and now this is another layer of that,” Mr. Auden said.

Nomura's Mr. Gallant said he thought there were a lot of “deeper problems” with the company if it has an organizational structure in which 23% of the top people are considered redundant. “There's a lot of inefficiency there. I think that's an indication that there are probably lots of problems that need to be addressed,” he said.