(Bloomberg) — John Paulson and Carl Icahn, who became billionaires by identifying mispriced securities and pushing for corporate shakeups, face a new challenge after winning seats on the board of American International Group Inc., the insurer that's been too big to manage for more than a decade.
Paulson was nominated to be a director along with Samuel Merksamer of Icahn Capital, the insurer said Thursday after markets closed. As if to highlight the task ahead, the New York-based company simultaneously announced a fourth-quarter loss of more than $1.8 billion, driven by higher-than-expected claims costs at the property-casualty operation, the business that Icahn and Paulson's firm have said should be the core of a scaled-back AIG.
"Their job is to keep the pressure on," Robert Haines, an analyst at CreditSights, said in an e-mail. "They have an uphill battle, but every time AIG stumbles, their argument gets stronger."
The additions to the board mark a reversal for AIG after Chief Executive Officer Peter Hancock rebuffed Icahn's demands to break the firm into three companies, one offering P&C coverage, another providing life insurance and a third backing mortgages. Hancock said a split could hurt the company's credit rating and jeopardize tax assets. The CEO also had dismissed Icahn's insistence that there could be substantial benefits in avoiding the regulation that comes with AIG's designation as a systemically important financial institution, or SIFI.
Has to Listen
Now, Hancock "has to listen to them," Haines said. "These guys are not just some outsiders. They are part of the actual company."
Hancock is a former J.P. Morgan & Co. and KeyCorp banker who joined AIG in 2010. In September 2014, he became the insurer's sixth CEO since 2005. He has already shaken up management twice to simplify operations, boost returns and narrow the company's focus. Still, he's been unable to meet his own target of a 10 percent return on equity.
Hancock wasn't quoted in AIG's statement about expanding the board to 16 members from 14. Rather, there was a comment from Chairman Doug Steenland praising Paulson and Merksamer.
The accord allows AIG to pursue Hancock's turnaround plan without being distracted by the threat of a proxy fight until next year, according to people familiar with the arrangement. The deal includes a non-disparagement agreement. Jon Diat, a spokesman for AIG, declined to comment, as did a representative for Paulson. Icahn didn't respond to a message.
'Let Them In'
"Rather than having the activist shareholders lob accusations from the outside, let them in the door," said Charles Sebaski, an analyst at BMO Capital Markets. "Let them see this is the reality of what's going on, at least to the best of the knowledge of the management team."
Icahn has more than 40 million shares, a stake of about 3.4 percent, according to data compiled by Bloomberg. Paulson's hedge fund firm has more than 14 million shares.
"Splitting up the company is harder than it looks," said Meyer Shields, an analyst at Keefe, Bruyette & Woods. "The real path to value creation is by finding and shuttering the businesses where AIGproduces dreadful results" and new directors will help, he said.
AIG advanced 1.7 percent to $51.36 in extended trading at 6:26 p.m. in New York. The insurer had dropped 18 percent this year through 4 p.m. AIG announced the board nominations after the close of regular trading.
Radian, Hartford
While Paulson is best known for building a fortune in the financial crisis with bets against subprime mortgages, his hedge fund firm has also helped turn around insurers including CNO Financial Group Inc. and mortgage guarantor Radian Group Inc.
He demanded in 2012 that Hartford Financial Services Group Inc. break into separate companies. While Hartford's then-CEO Liam McGee didn't go as far as Paulson initially demanded, he did sell major units and eventually won praise from the hedge fund manager.
