American International Group (NYSE:AIG) will spin off its mortgage insurance business, a move that could appease activist investor Carl Icahn, according to a report from Reuters based on information from people with knowledge about the matter.
The mortgage insurance unit generated $791 million for the first nine months of 2015, and accounts 7.4% of the pre-tax operating income of AIG for the period.
Mr. Icahn is demanding the insurance giant to accelerate cost cutting and to break-up itself into three separate public companies. The activist investor believes that the insurance giant is “too big to succeed” and it needs to shrink itself below the threshold of a systemically important financial institution (SIFI).
The Financial Stability Board considers a bank, insurance company, or any financial institution as a SIFI if its failure could trigger a financial crisis. During the 2008 financial crisis, the U.S. government bailed out AIG and other financial institutions, which was the primary reason behind its inclusion in the SIFI list.
Market observers suggested that AIG’s spinoff of its mortgage insurance unit is not enough to deter Mr. Icahn from launching an activist campaign. The activist investor holds 42 million shares—one of the largest shareholders of the insurance giant.
AIG to release strategic plan next week
AIG is expected to release its strategic plan on Tuesday. The insurance giant is also expected to discuss its future plans for the mortgage insurance unit. Additionally, AIG will pursue a partial spinoff of the business, according to sources.
Furthermore, the sources said AIG is expected to provide shareholders with an update regarding sale of its Advisor Group unit. It will also talk about other initiatives to win the support of investors.
The sources requested Reuters to keep their identities anonymous because AIG’s deliberations are confidential, and it still finalizing the details of its plans.
AIG maintains active dialogue with shareholders
“AIG continues to take steps to narrow its focus, improve its financial performance, and return capital to shareholders. AIG maintains an active dialogue with shareholders, including Carl Icahn. As previously announced, on January 26, AIG will provide an update on its strategy and its proactive plan to drive shareholder value,” according to the insurance giant in a statement last week.
At the same time, Mr. Icahn reiterated its position that the only sensible path for AIG is to become a smaller and simpler company and move to a direction removing itself from the SIFI list.
Mr. Icahn also expressed his view that AIG “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.”
According to the activist investor, the insurance giant’s management credibility will be lost if it fails to present a bold strategy to improve value for shareholders. He hoping the Board will take matters into its hands if management still resists drastic change.