This morning provided some interesting news as famous activist investor Carl Icahn has announced that he has taken a large position in AIG.  AIG is and has been one of our largest positions, which we have been very successful in over the last 5 years.  We’ve recently added materially to it in many accounts during the general market decline.  Basically, Icahn wants management to split the company into 3 smaller companies via tax-free spinoffs.  This would leave separate P&C, Life, and mortgage insurance companies.  It would greatly reduce the costs and capital constraints that come with being a SIFI, or a systematically important financial institution, as all 3 companies would be below the minimum threshold.  It would also allow the companies to focus on improving their operating profit margins, which have lagged their peers.  I believe this is a very solid plan and I don’t always agree with Icahn’s strategies.  While AIG is an $80 billion dollar company so it might not be too easy to influence, it has some very large and smart shareholders such as Bruce Berkowitz and John Paulson.  Now with Icahn involved, there is a clear catalyst for change and I don’t believe management will adequately be able to avoid making the positive changes that are recommended.  This is a stock that within a few years could easily be worth in excess of $100 per share, especially if they perform these spinoffs, as you could see considerable M&A activity at much higher prices.  Keep in mind that book value is above $80 per share already and that will grow via retained earnings and stock buybacks done at a discount to book value.

Secondly, I want to point out that we could write the same story about just about all of our large financial holdings.  All of the stocks are obviously undervalued by any metric imaginable.  Sentiment is terrible due to the regulatory and political environment.  This is why there has been and continues to be such a fabulous long-term opportunity.  So many investors get caught up focusing on short-term returns and chasing performance.  Investors in healthcare and industrial stocks just learned very painful lessons about the folly of this tactic.  While the market has rallied considerably in October, many stocks have been absolutely destroyed.  Even companies that have beat earnings have seen declines between 10-20% in many circumstances.  This is what happens when you get to a late stage bull market.  Our focus is on maximizing long-term investment returns and reducing risk.  I can’t predict whether financials will outperform in the next 3 months or even 1 year, but the odds of us outperforming over the next 3-5 years are extremely high in my estimation. Just as importantly, I cannot fathom a way in which we should lose money on our largest positions.  This news about Icahn is a very important catalyst and I expect that other companies will begin taking a closer look at their operations, which will be a major positive for us.  Thank you very much and below you will find Icahn’s letter to AIG’s CEO Peter Hancock.


Carl Icahn Letter to AIG CEO