Here’s what analysts think will happen at AIG now that activists have taken board seats

Industry observers see four possible outcomes now that two board members with activist ties to Carl Icahn have taken their seats

Insurance News

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Insurance industry analysts are buzzing as two new members of the American International Group board of directors – who have ties to activist investor Carl Icahn – take their seats.

Samuel Merksamer, a lieutenant to Icahn, and John Paulson of hedge fund Paulson & Co. took their seats Wednesday as AIG holds its annual shareholder meeting and expands its board to 16 members. The move comes as part of a truce between Icahn and AIG in February, in which Icahn advocated splitting the firm into three companies to limit losses.

AIG leadership did not agree with the plan, but made concessions by appointing two of the activist investors to the board.

Now, industry observers are expecting a range of potential outcomes for the new board members and for AIG.

Writing in The Wall Street Journal, Leslie Scism and Joann S. Lublin suggest Paulson and Merksamer may push for a new AIG chief executive to replace Peter Hancock, who has been hostile to activist plans. If the new board members choose to go this route, however, they will likely be unsuccessful; sources suggest that the vast majority of the AIG board is behind Icahn, and other directors will resist if the two newcomers attempt to fire Hancock.

“The answer will be no,” an undisclosed source told the paper. “That will be a short conversation.”

In that case, Paulson and Merksamer may “wait out” Hancock, whose performance is scheduled to be evaluated over the next year to 18 months.

Hancock, who has been criticized by activists and others for not having enough of a background in property/casualty insurance, must demonstrate the company is making demonstrable progress in order to retain his position.

According to the Journal, directors will likely be concerned if Hancock has failed within the next 15 months to cut costs or improve insurance margins.
“We believe management must successfully execute their objectives in less than two years,” said Todd Bault of Citi Research. “At some point in 2017, the success of their current plan will be determined and confidence in management will follow.”

Bault added that “lack of confidence in management” is one of the biggest reasons AIG shares currently trade at less than book value.

Aside from pushing out leadership, analysts speculate the two new members may push for greater changes to the company – possibly including greater plans to sell and break up businesses.

“With the activists soon to be seated on the board, we believe management’s baseline plan is only a starting point for the discussions about unlocking value through divestitures that we believe will soon come,” said Josh Stirling, an analyst with Sanford C. Bernstein.

Finally, interacting on the board may lead the activists to conclude that AIG is on the right track and agree to a ceasefire.

In that case, AIG will continue with steps outlined by Hancock to increase shareholder returns. Already, the company has returned nearly $5 billion in buybacks and dividends this year.

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