AIG American International Group Inc

   (FROM THE WALL STREET JOURNAL 2/12/16) 
   By David Benoit and Leslie Scism 

Billionaire investors Carl Icahn and John Paulson dropped their public fight with American International Group Inc. on Thursday, promising a year of peace in exchange for two board seats.

The pact ends a monthslong showdown between the two activist shareholders and one of the largest insurance companies in the world. Messrs. Icahn and Paulson urged the company to break up and were publicly critical of AIG's structure and performance.

Their argument was that by dividing into smaller parts AIG could escape onerous regulations imposed by federal policy makers in an effort to head off systemic threats like the one AIG once posed during the last financial crisis.

AIG and its Chief Executive Officer Peter Hancock resisted that breakup call and argued the company was better off with its life and property and casualty insurance units together, though Mr. Hancock did unveil steps to shrink the conglomerate in coming years.

The moves failed to persuade Mr. Icahn that the board was doing as much as he thought could be done. Settlement talks between the activists and AIG Chairman Douglas M. Steenland accelerated this week and went straight through Thursday afternoon, people familiar with the matter said, ahead of a weekend deadline for investors to launch a proxy fight.

AIG in the end agreed to nominate Mr. Paulson and Samuel Merksamer, one of Mr. Icahn's top lieutenants, to its board at the company's 2016 annual meeting. In exchange, Messrs. Icahn and Paulson agreed not to wage a proxy fight this year. That could have put AIG's performance and management team under a harsh light, something the company hasn't seen since the days when it took a nearly $185 billion, since repaid, U.S. government bailout.

The settlement includes a standstill that would expire in August, according to a securities filing, which would keep the parties from publicly airing more concerns.

"We continue to believe that smaller and simpler is better and look forward to working collaboratively with the board and management to help catalyze a turnaround," Mr. Icahn said in a statement. His aim, he said, is to get AIG to shed its federal designation as a systemically important financial institution.

Referring to the new board members, Mr. Steenland said AIG looks forward "to benefiting from their insights."

A representative for Mr. Paulson's Paulson & Co. hedge fund said the firm had no comment.

The agreement came as AIG released fourth-quarter results. The insurer posted a $1.84 billion loss on a previously announced strengthening of claims reserves while increasing its common-stock dividend and buyback program. AIG shares edged up 1.9% to $51.49 after hours.

Other insurance stocks fell sharply Thursday as worries mounted about the pain of plunging oil prices and the possibility that low interest rates won't go away as fast as expected. Prudential Financial Inc. dropped 9.5%, to $58.

Rising rates are good for large insurers because they tend to invest the premiums paid by individuals and businesses in high-quality corporate bonds as a way of generating income until claims come due.

The fear among insurance investors is that the Federal Reserve won't follow through on its desire to gradually raise interest rates this year because of concerns about global economic growth. That means the pressure on insurers' investment income could remain -- potentially for years.

In recent months, Mr. Icahn had suggested he would seek directors who could replace AIG's CEO, Mr. Hancock.

Mr. Hancock committed on Jan. 26 to a wide-ranging set of initiatives to improve financial results, including returning at least $25 billion of capital to shareholders over the next two years, as an alternative to the dramatic split envisioned by the billionaire investors. He promised improvement in profit metrics over the next two years, through more aggressive cost-cutting, sales of some operations and exiting some business-insurance segments. The company also announced a planned initial public offering of up to 20% of its mortgage-insurance unit and the sale of a financial-advisory business.

Mr. Hancock is "moving forward with a sense of urgency" to put the strategy into place, and has spent a significant amount of time meeting with shareholders over the past few months, one person familiar with the matter said.

Last month, Mr. Hancock surprised investors with the announcement of a plan to strengthen reserves.

The reserve strengthening and a $222 million pretax restructuring charge created a fourth-quarter loss of $1.84 billion, or $1.50 a share, compared with net income of $655 million, or 46 cents a share, in the year-earlier quarter.

---

Joann S. Lublin contributed to this article.

(END) Dow Jones Newswires

February 12, 2016 02:47 ET (07:47 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.