Break up AIG!

I worked for AIG for three years of my life 1989-1992.  In general, though I learned a ton while working there, I did not like the experience.  As my boss at Provident Mutual said to me, “My greatest doubt about you was that you survived there for three years; it made me wonder about your character.”

That’s probably a bit severe, but turnover was high among employees in the first five years; after that, there were many who would “lifers.”  Turnover would be low after five years.

Now, my stylized history of AIG takes it through the glory days of the 1980s, where return on assets [ROAs] was high, and financial leverage low.  ROA is a much better way to measure insurance company performance than return on equity [ROE].  Earning a spread between assets and liabilities is tough.  Earning an underwriting profit is tough.  Borrowing money to buy back stock is easy.  From the early 90s to the present, AIG became increasingly more levered.  ROE stayed near 15%, but it was less and less ROA, and more and more leverage.

I was never a great fan of my former employer, but I convinced the hedge fund that I worked for to buy some AIG when it was cheap.  We sold around $76, on the day it went into the DJIA.  It hasn’t seen that level since.

When AIG had their big problems, and ejected Greenberg, I wrote a lot at RealMoney about the situation.  The possibilities of accounting manipulation did not surprise me; my own experience there was that we played it to the edge.  AIG has been downgraded by the ratings agencies since then, but because they were big, they delayed the downgrading.  It should have happened years earlier, but Hank intimidated the ratings agencies.

So, I’m not surprised that Hank Greenberg might have directed his employees to achieve a certain GAAP earnings result through a reinsurance treaty.  To me, that would be normal.

It also does not surprise me that Hank is going after present AIG management regarding their recent disappointing earnings.  What does surprise me is the thought that International Lease Finance wants to go its own way.  When the deal originally was done, there was some skepticism inside AIG, but the word was that the tax benefits made the deal work on its own.    My skepticism today is that AIG will not want to let go of a successful division.  It doesn’t make sense.

Now, Hank can fight AIG management as much as he wants.  (One, two, three.)  My opinion is that poor Martin Sullivan is not capable of managing such a large enterprise, and that it would be better if AIG were broken up.  (Okay, ILFC, see if you can survive on your own.)  Create a US life company, an international life company, a US P/C insurer, one for the foreign P/C business, and one more company to hold everything else.

Hank can complain, but the problems are bigger than the current management team, or Hank, can deal with.  AIG needs to shrink– reduce leverage, focus on underwriting profitability, exit unprofitable lines, as AIG did back in the 80s.  Give up market share, shed employees, become more profitable.  Essentially, they need to undo a lot of what Hank did.  The synergies of the combined enterprise are small, so break up AIG and let new managers focus more intensely on their less diverse enterprises.