Why A Breakup Might Not Solve AIG's Problems

• Shares of American International Group Inc (NYSE: AIG) have appreciated 9.53 percent year-to-date, with a high of $64.54 on July 29.
• Deutsche Bank’s Joshua Shanker has maintained a Hold rating on the company, while lowering the price target from $64 to $62.
• Although activist investors have been suggesting a breakup of American International Group, Shanker believes that a breakup would not solve the company’s problems.

According to the Deutsche Bank report, “Activists argue that a break up allows AIG 1) to aggressively return capital to shareholders, 2) to escape from the onerous constraints of SIFI regulations and 3) reduce business complexity and focus attention on reducing expenses.”

However, management has countered these points by saying that the company is already returning capital to shareholders aggressively, while the SIFI regulations are rating agency requirements that would tighten in the event of a breakup, and that a breakup is not necessary for the company to focus on expense control.

Analyst Joshua Shanker stated that while management’s rebuttal makes sense, “expense reduction has consistently failed to meet the expectations we have had for the company, leaving us to begrudgingly admit that this business must be more difficult to fix that we had formerly imagined.”

Although the company is likely to report disappointing earnings in times to come, Shanker believes that the stock has downside protection, given its already low valuation and a “bid” from activist investors wanting a breakup of the company.