“In the wake of the recent shareholder poll by Sanford Bernstein, the separation announcement by MetLife, and continued conversation with shareholders, it is abundantly clear to me there is only one sensible path for AIG to follow: become a smaller, simpler company with a path to de-SIFI. I recently had a discussion with Chairman Douglas Steenland regarding the upcoming investor presentation and he agreed that if shareholders’ wishes go against those of the CEO, the board would definitely listen, take notice, and pay attention to what shareholders want. I was happy to hear this open mindedness because I believe management’s credibility with shareholders is all but gone. I suspect, after two months of waiting, management will release a “strategic update” on January 26th that fails to present a drastic strategic shift and instead is limited to only incremental changes such as small-scale asset sales and incremental cost cutting. If this occurs then the little credibility management now has will be lost. It is my hope that after the events outlined above and in light of management’s poor performance over the last several years, particularly in the property & casualty (P&C) segment, the board will take matters into its own hands if management still resists drastic change.
To make matters even worse, management has been either purposely misleading in their public disclosures or is negligently uninformed regarding the feasibility of a de-conglomeration plan. In conversations with management, I learned that disclosures provided on the third quarter earnings call regarding obstacles to de-conglomerating AIG were in some cases materially inaccurate. As an example, members of management have acknowledged to my team that their analysis of the risk posed to realization of the deferred tax assets failed to take into account a realistic time line to execute spin/IPO transactions (i.e. they simply assumed the spin/IPO would be effective the day after the earnings call). In addition, management failed to account, by their own admission to us, for deductibility of foreign tax credits in the event they could not otherwise be utilized. These lapses, in my opinion, show that management has been, to say the least, misleading in telling shareholders they have conducted any meaningful analysis of the impact a de-conglomeration strategy would have on the business – and to say the worst, they may have purposely misstated the facts to both the board and to shareholders. Furthermore, this calls into question the credibility of all other information they have provided on the topic. The fact that this public guidance, which we believe to be misleading and materially incorrect, has not been corrected, even after discussions with us whereby management acknowledged their errors, is simply unconscionable.
We believe that to meet the minimum expectations of stakeholders AIG must address four key concerns:
- Commit to streamline operations and focus on transforming the company into a competitive, pure play P&C insurer by committing to sell, spin, or otherwise separate non-core operations to de-conglomerate and apply to de-SIFI.
- Commit to fixing the P&C franchise so that it can generate competitive, double digit return on equity (ROE) through improved underwriting and cost reductions, even if it means bringing in outside talent.
- Commit to providing additional disclosure so all stakeholders can measure progress along the path outlined above over the next several quarters.
- Abandon credit default spreads levels as a metric in the long-term incentive plan (we believe this incentive is one reason management is resisting a de-conglomeration as it may negatively impact their bonuses) and instead adopt ROE.”
On the next page, we are going to take a closer look at the overall hedge fund sentiment surrounding AIG amid Icahn’s moves.