American International Group Inc. (NYSE:N:AIG) stock got additional attention after activist and billionaire investor, Carl Icahn, disclosed his stake in the company. More than that, he sought the company to be split into three publicly traded companies. The insurance firm’s CEO, Peter Hancock, has rejected the proposal, saying that it would not be any helpful either to the company or its shareholders. However, Icahn is committed to pushing his proposal with his fellow shareholders. As the billionaire investor sees Hancock as the unwilling person to push through his proposals, Icahn is also ready to seek his removal from the CEO position. The management is also holding meetings with two small groups of the biggest investors. The stock is trading near the yearly high price, and investors are worried as to what awaits next for them.
Clarity On Strategy Needed
Hancock might have reasons to defend AIG to remain as a single entity. Therefore, he needs to clear the air surrounding its tactics, as well as, goals while meeting the small group of big investors. Clarity must come on what it terms as ‘One AIG’ and the reason to invest in growth since they have not met their own targets set in respect of margin. There was little proof of the margin expansion in the last one-year period. As a shareholder-owned company, it needs to clarify whether they still have the target of 10% return on equity. The company’s most recent quarter results failed to meet the Street analysts’ expectations, thus disappointing investors and giving an edge to activist investors.
As a result, some of the frustrated shareholders seek some radical solutions when American International Group meets the big shareholders. Therefore, any discussions with them should revolve around the tactics to be pursued in the future for better understanding. For years, the company has outlined its priorities, i.e. modernizing, streamlining and adding fresh talent to fuel operating margins in P&C. There was already an impression that the insurer has never been point blank in explaining its tactics with its shareholders, be it big or small. The only favorable factor was that it was leveraging its capital to boost its book value through the share repurchase program. Therefore, the onus is on the insurer to convince the big shareholders about its tactics to get a wider support to stand with it at the height of Icahn’s exerting pressure.
Management Should Address Series Of Disappointments
Of late, AIG has been disappointing shareholders with its recently re-set targets. The insurance firm should come out to discuss openly and address the issues of series of disappointments. That can be done only if the management demonstrated its willingness to explain the way they understand and executed their plans. Also, the management should come out with ideas to get back to their operating momentum in line with the stated objectives. The company has revealed about the fresh disclosures in respect of normalized ROE, and it is now easier to control the volatility besides isolating its progress on a quarterly basis.
There is an element of doubt whether American International Group is taking a long time than expected in meeting the set targets. Alternatively, there has also been a feeling whether the company was just doing the right way to achieve its set goals as it failed to provide any evidence of progress in its turnaround efforts of P&C businesses. Therefore, the company is compelled to explain where it failed and how it is going to address the issues with the investors. There were some series of underwriting misses in its recent quarter. Though it might have been a minor one, it was a fact that it was troubling. There was a sense of belief that the complexity, as well as, the distraction of reorganization apart from the focus on growth over profitability have led to losing its focus on its set goals. The insurer needs to be honest if they were serious in getting the support of the big investors. That could also ensure to keep the activists’ investors at bay.
Place Shareholders Value On Top Of The Agenda
American International Group cannot take the activist investors light and should demonstrate its willingness to listen to shareholders in all its earnest to place the value on top of the agenda. The insurance firm’s balance sheet and health of its business have undergone significant changes since the financial crisis or after getting the bailout package in 2009. That was made possible after years of increasing pricing, as well as, adding to its reserves.
The insurer needs to clarify clearly on the need to stay as a conglomerate and the synergies that it would likely to get. In the face of mounting pressure from Icahn, AIG should also spell out the reasons to pursue integration than divestiture given the execution risk in their fix-it plans. The company’s operating businesses are already struggling to deliver a 7% return on equity due to its cost, capital, and tax structure. It is not an easy task but a tough proposition to convince the need to stay as ‘On AIG’.
Still A Long-Term Bet
Though there are some issues that needed the attention of the insurer, its stock is continued to be a compelling long-term bet, according to Berstein senior analyst, Josh Stirling. With the activist involvement, he said that he would back the truck. Though American International Group might have missed its targets, it was fueling margins with a safety following its transformation. As a result, it is trading at a considerable discount to its rivals’ multiples. Therefore, the stock would outperform given the value and the activist investors involvement as a catalyst. There are also potentials to unlock some of its values.
Conclusion
The insurance firm needs to address some of the concerns that investors have. However, that is not altering its valuation or the sentiments or the multiples, which is lower than its rivals. That provides an opportunity to probe further into American International Group shares. Activist investor entry is an additional catalyst. Therefore, there is still growth available in the stock.