Aside from Abnormal Returns (one of my favorites, good to see him back), my comments on AIG were also cited by Felix Salmon at Market Movers. I tried to post this comment there, but the software would not let me, and I have no idea why:
Thanks, Felix. With the Wells Notice served to Hank Greenberg, this chapter of the AIG story is not over yet.
Sometime in the future, I’ll find and post a copy of the memo where Hank Greenberg discovered the massive under-reserving at ALICO Japan, giving his response to the problem… but given the billion dollar hole, it was amazing that AIG did not miss earnings that quarter, because it was much larger than their quarterly earnings.
And some of my insurance analyst friends wonder why I don’t find AIG to be cheap…
But, regarding the recent AIG news flow, my timing is not something that I attribute to skill. I don’t believe in luck, but that Greenberg would get the Wells Notice so soon, that AIG would indicate willingness to sell off non-core units, or that they would raise significantly more capital than they previously indicated was not something I would have expected would happen the next day.
As I mentioned at RealMoney back when Greenberg left AIG, my experience in my three years inside AIG was that we (the small actuarial unit that I was in in Wilmington, Delaware) found five reserve errors worth more than $100 million, but none of them ever upset AIG’s quarterly earnings. That is why I remain a skeptic on AIG.
five reserve errors worth more than $100 million, but none of them ever upset AIG’s quarterly earnings
Very interesting. A few days ago, on another blog I was discussing how typical investors equate volatility and risk. The higher the volatility, they think, the higher the risk. Often true. However, the corrollary lower volatility means lower risk is wrong I say. Indeed, extremely low volatility investors should treat as a big red flag.
I’m going to add AIG to my volatility-risk anecdote list.
Thinking about it a little, I’m going to guess this mistaken belief took hold because between differing asset classes (stocks vs. bonds vs. commodities; individual issues vs. mutual funds) volatility and risk are positively corrolated. But one should not extrapolate it too far within an asset class.