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John Paulson: Change Of Plans

Activist investor Carl Icahn is trying to break up American international Group (AIG). Fellow billionaire John Paulson is a supporter of the Icahn plan, while AIG CEO Peter Hancock is opposed to splitting the company into three parts. 

Typical activist investor shenanigans; why can’t we all just get along?  

There’s a few headwinds for a breakup of AIG — where it would negatively impact the credit rating and it’s unlikely that the federal government would let them drop the SIFI (systemically important financial institution) designation that quickly. 

The quick answer

Rather — the interim answer, and one that Icahn might agree to, is to sell some additional assets to interested parties. This is plan that Paulson has already privately endorsed. 

The thinking here is that the M&A market in the insurance industry is robust right now. Think of StanCorp, Symetra and Fidelity & Guaranty deals over the last few months. So selling assets would bring in more money than simply splitting the company up or spinning off assets. 

This transition in thesis for Paulson is likely something he picked up from Hartford Financial. Paulson got involved with Hartford in 2012 pushing for a break up of the company, not unlike the AIG—Icahn thesis. Hartford, instead, sold off various assets and saw its stock gain 75% — from $20 a share to $35 — over the next two years.  

I’ll take AIG for $100 a share?

Paulson has said before that AIG is worth $100 a share. Now, he’s walked it back to $75 — but this path could be quicker and simpler for the insurer. 

Paulson thinks that AIG can dump/sell its life insurance business for $43 billion — which is about a 30% premium to where the company would trade publicly. 

There’s the mortgage guarantor business, United Guaranty, that could be sold for $6.5 billion — a 33% premium to its publicly traded market value.

That would leave the core property and casualty business — where Paulson sees fair value at $44 billion for that business.

All told — that’s $93.5 billion in market value — or $75 a share and roughly 20% higher from where it currently trades.