Even before Carl Icahn amped up the volume on his message to American International Group to make a “drastic strategic shift” last week, questions started to surface about whether other insurers are vulnerable to activist investors.

Robert Hartwig, president of the Insurance Information Institute, posed that exact question to a group of property/casualty insurance and reinsurance company executives at the Property/Casualty Insurance Joint Industry Forum a week before Icahn penned an open letter to the AIG board calling for a simplified structure of the insurer’s operations.

Constantine (Dinos) Iordanou, CEO of Arch Capital, initially said he didn’t know whether insurers as a group were vulnerable to activist pressures or not, but he went on to suggest that activists trying to financially reengineer insurance companies are living in “a fool’s paradise.”

“In our business, companies don’t get weak overnight. It takes time for them to get weak.

“And they don’t get healed overnight. It takes time.

“You don’t have to look much further than how good is the underwriting staff, how good is the claims staff, how good is the actuarial staff in these companies. That’s where the value creation in our business is,” he said.

While Icahn is calling for AIG to make a strategic shift to simplify its organization, Iordanou continued by reviewing some strategic moves to make companies bigger—the combinations of ACE with Chubb and XL with Catlin.

The ACE-Chubb deal makes strategic sense by creating a global enterprise that competes with only four-to-six others similarly situated to take on the world’s risks, Iordanou said. “XL Catlin is in that same category, strategic in nature. But at the end of the day the success or failure of even these strategic transactions is going to be determined by the quality of that underwriting personnel. Can they maintain that underwriting personnel? Can they maintain the quality of the claims staff?”

Activists, he said, “miss that piece of the puzzle. They think that by doing financial engineering and restructuring and cutting some expenses here and there, you’re going to improve the performance. They’re in fool’s paradise. At the end of the day, there is hard work that needs to be done,” he concluded.

Hartwig also directed the question to Tad Montross, CEO of General Re, which is part of Berkshire Hathaway, caveating his question with the observation that Warren Buffett is not that kind of investor.

“I just know what I read in the papers,” Montross responded. “It seems like any company that slips on their operating results is going to be vulnerable” to the pressures of a significant shareholder,” he said. “All companies are vulnerable right now.”

In his open letter to the AIG board last week, Icahn reiterated an earlier call for AIG to “streamline operations and focus on transforming the company into a competitive, pure play P/C insurer” by selling, spinning off or finding other means “to separate non-core operations to de-conglomerate.”

“In the wake of [a] 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,” Icahn’s letter began, referencing the fact that AIG and MetLife have been designated by the Financial Stability Oversight Council as systemically important financial institutions, which are subject to higher regulatory standards.

On Jan. 12—the same day as the P/C Forum—MetLife’s announced a plan to pursue a separation of its retail insurance operations. Steven A. Kandarian, MetLife chairman, president and CEO, explained how the SIFI status played into the decision. “Even though we are appealing our SIFI designation in court and do not believe any part of MetLife is systemic, this risk of increased capital requirements contributed to our decision to pursue the separation of the business. An independent company would benefit from greater focus, more flexibility in products and operations, and a reduced capital and compliance burden,” Kandarian said in a press statement.

AIG management is scheduled to give a strategic update on Jan. 26, and Icahn isn’t expecting things to go his way. Instead, he said that AIG’s plans will likely be “limited to only incremental changes such as small-scale asset sales and incremental cost cutting.” He added, “If this occurs then the little credibility management now has will be lost.”

On Friday, financial publications including Bloomberg, Reuters and the Wall Street Journal reported that AIG is planning of partial spinoff of its mortgage insurance business.

But AIG has contended that Icahn’s demands for AIG to split into three separate P/C, life and mortgage insurance companies (to lose the SIFI label) would, among other things, cause AIG to lose the benefit of a diversification credit that figures into rating agency assessments.

During a third-quarter earnings conference call, AIG CEO Peter Hancock said that “rating agencies are the key determinant of how much capital is available for distribution, and they have given AIG significant credit for our scale and diversified business model.

“Rating agencies have noted the existing diversification benefit from our multiline structure. Thus we believe that less capital would be available for distribution to shareholders if we separated these businesses.”

Separately, in a research note published last week, analysts William Wilt and Alan Zimmermann of Assured Research and Gordon Haskett Research Advisors, delved into AIG’s argument—and detailed calculations supporting AIG’s position on the rating agency credit.

Using estimates of the diversification credit embedded in the NAIC’s risk-based capital calculation as a close proxy to the rating agency credits, Wilt and Zimmermann estimate a diversification benefit of more than $7 billion (for five of the eight U.S- based AIG P/C and life insurers designated as “material entities” in the AIG Resolution Plan created for the Federal Reserve).

This analysis supports a figure cited by David Herzog, the former chief financial officer of AIG, on the same AIG third-quarter earnings conference call. Asked by an analyst to quantify the credit Hancock referred to, Herzog said that for Standard & Poor’s it is something “north of $5 billion.”

(Editor’s Note: Herzog is one of four senior executives who were slated to leave the company after a period of transition, according to an early December announcement from AIG.)