American International Group Inc (AIG): Hedge Funds Are Snapping Up Amid Activist Targeting

A market correction in the third quarter, spurred by a number of global macroeconomic concerns ended up having a negative impact on the markets and many hedge funds as a result. The stocks of smaller companies were especially hard hit during this time as investors fled to investments seen as being safer. This is evident in the fact that the Russell 2000 ETF underperformed the S&P 500 ETF by 14 percentage points between June 25 and the end of October. We also received indications that hedge funds were trimming their positions amid the market volatility and uncertainty, and given their greater inclination towards smaller cap stocks than other investors, it follows that a stronger sell-off occurred in those stocks. Let’s study the hedge fund sentiment to see how those concerns affected their ownership of American International Group Inc (NYSE:AIG) during the quarter.

American International Group Inc (NYSE:AIG) registered an increase in popularity among smart money investors during the fourth quarter and the number of bullish hedge fund positions moved up by seven. However, the level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity, but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as QUALCOMM, Inc. (NASDAQ:QCOM), U.S. Bancorp (NYSE:USB), and Toronto-Dominion Bank (USA) (NYSE:TD) to gather more data points.

American International Group has been in the headlines recently as the company has been targeted by famous activist billionaire Carl Icahn. Icahn has been urging AIG to split into three independent, publicly-traded companies in order to maximize shareholder value. Here’s what Icahn said in his last open letter to the company’s board of directors:

“In the wake of the recent shareholder poll by Sanford Bernstein, the separation announcement by MetLife, and continued conversation with shareholders, it is abundantly clear to me there is only one sensible path for AIG to follow: become a smaller, simpler company with a path to de-SIFI. I recently had a discussion with Chairman Douglas Steenland regarding the upcoming investor presentation and he agreed that if shareholders’ wishes go against those of the CEO, the board would definitely listen, take notice, and pay attention to what shareholders want. I was happy to hear this open mindedness because I believe management’s credibility with shareholders is all but gone. I suspect, after two months of waiting, management 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. If this occurs then the little credibility management now has will be lost. It is my hope that after the events outlined above and in light of management’s poor performance over the last several years, particularly in the property & casualty (P&C) segment, the board will take matters into its own hands if management still resists drastic change.

To make matters even worse, management has been either purposely misleading in their public disclosures or is negligently uninformed regarding the feasibility of a de-conglomeration plan. In conversations with management, I learned that disclosures provided on the third quarter earnings call regarding obstacles to de-conglomerating AIG were in some cases materially inaccurate. As an example, members of management have acknowledged to my team that their analysis of the risk posed to realization of the deferred tax assets failed to take into account a realistic time line to execute spin/IPO transactions (i.e. they simply assumed the spin/IPO would be effective the day after the earnings call). In addition, management failed to account, by their own admission to us, for deductibility of foreign tax credits in the event they could not otherwise be utilized. These lapses, in my opinion, show that management has been, to say the least, misleading in telling shareholders they have conducted any meaningful analysis of the impact a de-conglomeration strategy would have on the business – and to say the worst, they may have purposely misstated the facts to both the board and to shareholders. Furthermore, this calls into question the credibility of all other information they have provided on the topic. The fact that this public guidance, which we believe to be misleading and materially incorrect, has not been corrected, even after discussions with us whereby management acknowledged their errors, is simply unconscionable.

We believe that to meet the minimum expectations of stakeholders AIG must address four key concerns:

1. Commit to streamline operations and focus on transforming the company into a competitive, pure play P&C insurer by committing to sell, spin, or otherwise separate non-core operations to de-conglomerate and apply to de-SIFI.
2. Commit to fixing the P&C franchise so that it can generate competitive, double digit return on equity (ROE) through improved underwriting and cost reductions, even if it means bringing in outside talent.
3. Commit to providing additional disclosure so all stakeholders can measure progress along the path outlined above over the next several quarters.
4. Abandon credit default spreads levels as a metric in the long-term incentive plan (we believe this incentive is one reason management is resisting a de-conglomeration as it may negatively impact their bonuses) and instead adopt ROE.”

On the next page, we are going to take a closer look at the overall hedge fund sentiment surrounding AIG amid Icahn’s moves.

In today’s marketplace there are a large number of indicators stock traders have at their disposal to value publicly traded companies. A duo of the most underrated indicators are hedge fund and insider trading activity. Our experts have shown that, historically, those who follow the best picks of the elite investment managers can outpace the market by a significant amount (see the details here).

Now, let’s take a peek at the latest action regarding American International Group Inc (NYSE:AIG).

How are hedge funds trading American International Group Inc (NYSE:AIG)?

At the end of the fourth quarter, a total of 101 of the hedge funds tracked by Insider Monkey were bullish on this stock, up by 7% from one quarter earlier. With hedgies’ capital changing hands, there exists a few noteworthy hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Carl Icahn’s Icahn Capital LP has the most valuable position in American International Group Inc (NYSE:AIG), worth close to $2.62 billion, comprising 8.9% of its total 13F portfolio. Sitting at the No. 2 spot is Paulson & Co, led by John Paulson, holding a $719.1 million position; the fund has 4.3% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors that hold long positions comprise Michael Lowenstein’s Kensico Capital, Robert Rodriguez and Steven Romick’s First Pacific Advisors LLC and Bruce Berkowitz’s Fairholme (FAIRX).

With a general bullishness amongst the heavyweights, specific money managers were leading the bulls’ herd. Amother activist, JANA Partners, managed by billionaire Barry Rosenstein, initiated the biggest position in American International Group Inc (NYSE:AIG). JANA Partners had $263.6 million invested in the company at the end of the fourth quarter. Benjamin A. Smith’s Laurion Capital Management also initiated a $79 million position during the quarter. The other funds with brand new AIG positions are Dmitry Balyasny’s Balyasny Asset Management, Emanuel J. Friedman’s EJF Capital, and Mark Kingdon’s Kingdon Capital.

Let’s check out hedge fund activity in other stocks similar to American International Group Inc (NYSE:AIG). These stocks are QUALCOMM, Inc. (NASDAQ:QCOM), U.S. Bancorp (NYSE:USB), Toronto-Dominion Bank (USA) (NYSE:TD), and UBS AG (USA) (NYSE:UBS). This group of stocks’ market values are closest to AIG’s market value.

As you can see these stocks had an average of 34 hedge funds with bullish positions and the average amount invested in these stocks was $2.95 billion. That figure was $10.96 billion in AIG’s case. QUALCOMM, Inc. (NASDAQ:QCOM) is the most popular stock in this table with a total of 68 funds holding long positions, while UBS AG (USA) (NYSE:UBS) is the least popular one. Compared to these stocks American International Group Inc (NYSE:AIG) is much more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers, as well as Icahn’s involvement and his track record of increasing values at many companies, it may be a good idea to analyze it in detail and potentially include it in your portfolio.