It seems that I can’t escape AIG anymore.? I asked my kids (who are still at home) today, “Of all the jobs I had, where did I get treated the worst?”? The oldest answered “AIG.”? He was born shortly after I left AIG in 1992.
I guess I made some of the wounds obvious enough.? I don’t believe in “payback,” I believe in “Love your enemies,” and “Be honest.”? Thus I find it odd that I am being ever more sought out by reporters on any AIG news.
Granted, I’ve written on underreserving by AIG, the problems they had at their operating insurance subsidiaries during the financial crisis, which got picked up by SIGTARP.
What has prompted recent inquiries, is the sale of stock at $29/share,? at only a 1.6% discount to the prior closing price.? That price was a hodgepodge between what the market would bear, and what would give the government a “profit.”? Bad idea in my opinion; it would have been better to price the deal lower, say $28.50, where the government took a loss, but where the market might have driven the price up.? A 1.6% gap is marginal and would invite sellers. $28.50 would be over 3% and would invite buyers.
Now, some sympathy for Bruce Berkowitz — He saw book value decline by almost $1 today, from $47.32 to $46.35.? I don’t know if he was buying as the largest private shareholder of AIG, but he was certainly disappointed by the company offering shares.? Why offer shares at less than 2/3rds of book?
Easy, because AIG can’t borrow or issue any other security.? But that is a signal to what the company is worth.? I mean at worst, AIG could have procured a secured loan to? provide $3 billion, offering a valuable subsidiary as collateral.? They chose to dilute, which tells you what the stock is likely worth.
Also, with such a large fall in price after the offering the next offering should come at a larger discount to the recent market price.? Those that were burned in this offering will be less willing to step up and take immediate losses.
Now, AIG has two other ways to improve their stock price.? Improve transparency, and improve Return on Equity.? The first of those means eliminate the sense that there could be negative surprises in the future.? That means that reserves have to be modestly conservative, unlike they have been in the past.? That means taking one last reserve strengthening to do so, if needed, even if it temporarily hurts the stock price because of the loss.
But if it can be shown that the loss is likely the last of such losses, and that AIG isn’t going to use its reserves to manipulate earnings any more, the loss in the stock price should be minimal.? After all, a lot of that is buried in the discount to book anyway.
Then comes improving ROE. The CFO Peter Hancock has said, ‘?We are moving away from any kind of top-line targeting,? Hancock said in a call with analysts. ?We think that leads you to do business at the margin, which is unattractive.?’
That’s some of the best news I have heard on AIG in some time.? If AIG limits its underwriting, and focuses on profitability, it has a lot of potential for upside, but that would mean:
- Reducing overhead expenses
- Compensating line managers on underwriting profitability, conservatively estimated.? Tie their long-term bonuses to aggregate underwriting profits.
- Eliminating marginal lines of business, including selling off lines where AIG has no sustainable competitive advantage, like investment management, consumer finance, aircraft leasing, and domestic life insurance.? The last of those is the most controversial — I would sell off the domestic life insurers to the highest bidder.? I suspect there would be willing buyers among the big players of the life insurance industry.? Use the proceeds to buy back stock from the government, or to reduce debt.
AIG would do best if it were a pure play P&C insurer.? As I have argued since long before the crisis, the size and complexity of AIG make it unmanageable.? Better management will come through creating a more focused company that does not require having a “superman” like Maurice Greenberg to manage it.
Disclosure: I don’t own any AIG, nor am I short.? The same for my clients.
“AIG would do best if it were a pure play P&C insurer.”
Any particular objections to life and annuity businesses to help smooth the effects of the business cycle on the combined ratio of the P&C businesses?
The two businesses are different, and there is no real cross selling. I do not know of any company that gets them both right.
Also, it exposes the P&C insurer to the credit cycle in a greater way. P&C insurance, if done conservatively, is self-stabilizing because premiums rise after disasters.
AIG is paying the price for Tim Geithner’s unethical (and arguably illegal) bailout. The only reason it was not prosecuted is because the sheriffs, Geithner and Paulson, were the ones robbing the bank, or the taxpayer as it were.
AIG is not a bank and was not a bank, and had no right to access the Fed. The NY Fed (with Geithner at the helm) paid off creditors (ie Goldman Sachs) at 100 cents on the dollar when not even the creditors thought they would get 65 cents. The only creditor present at the NY Fed was…. a Goldman employee.
The whole thing just stunk to high heaven of corruption and cronyism.
AIG can’t catch a break because by its own merits it should be out of business. The only difference between AIG and the donut shop that closed down the street from me is: the donut shop didn’t get a $20 billion bailout from Geithner. That is the only difference.
David — why does AIG need to be fixed at all? They failed. They should be out of business.
The big question is not how to fix AIG — they failed. The big question is how to fix the overall economy. We need to restore a meritocracy — not go along with Geithner’s crony capitalism.
AIG is dead. Get over it.
AIG should be dead. I argued against the bailouts, and especially AIG’s. It is one thing to protect systemic stability by being a DIP lender, quite another thing to be an equity investor.
But AIG is not dead yet. It has the potential to make some moves that change its trajectory. I follow it, for better or worse, because a gaggle of reporters ask me about it 4-6 times a year. They may be making some changes that will transform the company, and make money for shareholders.
Finally, they are one of the largest insurers by market capitalization out there. Why don’t they deserve attention?
I have no comment about the reporters asking you about AIG… As a general statement, I credit misinformation in the media as a major source of investment alpha.
AIG Financial Products got away with so much because they were the bulk of AIG’s reported earnings. Without the FP group, it is not obvious the rest of the firm is viable “as is”.
AIG is essentially a startup company, with all the uncertainty and risk that entails. Whatever legacy assets it has are completely overwhelmed by legacy debts.
AIG needed a bailout because it failed. Either the NY Fed (Maiden Lane vehicles) or else AIG itself should report absolutely devastating losses… supposedly Maiden Lane has a profit (cough), and the second has reported rather vanilla losses. At least one of those is a lie, and the markets know it.
The “book value” you speak of is an accounting measure, meaning it reflects Geithner’s artificial MBS price support. Anyone who knows a realtor knows housing is still a mess. Again, the market is pricing that in.
“Book value” also includes a very large amount of tax loss carry forwards… which only have value if AIG can generate sufficient profits to use them. AIG’s management has dutifully pointed out there is absolutely no guarantee AIG will generate sufficient profits to make use of these “assets”. As Government Electric (GE) learned, the public may not allow bailout companies to use tax loss carry forwards (the loss in brand value is more than the tax gain).
AIG’s ~$29 / share price is mostly face saving for Geithner / Bernanke — much like the Treasury’s sales of Citigroup. We have all seen the wonderful performance of Citi shares after the Treasury sold; and if anything, AIG’s underlying business models are at least as damaged as Citi’s.
AIG might be “one of the largest insurers by market cap out there” as you claim (market cap is a rather nebulous concept when the Treasury is gaming the share price). But the reality is Government Motors is still one of the largest cap auto manufacturers in the world — and few outside the UAW and Washington DC believe GM is economically viable without ongoing taxpayer support.
AIG’s P&C businesses, if they can be untangled from the rest of AIG, might make for a nice subsidiary of some other insurer. As a stand alone entity, they would have to do some serious retrenching and would essentially be a start up insurer.
But if you read management’s discussion of AIG’s business (or look at where they are putting their own money). In the opinion of AIG’s management, the current AIG probably can’t survive without a lot more taxpayer support.
The old David Merkel (before you went solo) would have pointed all this out to his readers. Your honesty, both in book reviews and in analyzing companies, is what made me want to read your blog.
Berkshire Hathway’s board did not give Buffett / Sokol the free pass that you appeared to. This post omitted any mention of AIG’s extremely precarious viability. And for some reason you quoted book value as provided by Geithner… Even if Geithner is being honest (cough), there are a lot of major caveats to the number that you didn’t even mention.
AIG has some talented people on the P&C side, and if they were in some other entity they would have lots of value. But AIG brings along too much baggage, which negates that value and then some.
Either Maiden Lane (that one holds AIG’s toxic waste) has to report massive losses… or else AIG is simply not viable. Massive, crippling losses are clearly present somewhere, and so far have not been disclosed. There are 1001 scenarios, but they fall into three major categories:
(1) It would be “politically inconvenient” (especially in an election year) for the Fed to report massive losses from bailouts.
(2) If AIG recognizes the losses in a single year, the company is finished — as probably should have happened all along.
(3) The only remaining scenario is for AIG to essentially capitalize their losses, and then realize the losses over a decade or longer. That would entail a massive drag on earnings, although it would allow politicians to save face.
Of course, AIG could theoretically declare bankruptcy and renege on CDS payments to banks … but that means a lot more bank failures and Geithner/Bernanke look like idiots. Probably wouldn’t be good for Obama’s election campaign either.
As you said David, “AIG is not dead yet”. Yet being the key word.
PS David … I wouldn’t bother reading (or commenting) on your posts if I didn’t think you are a smart guy who is worth reading. Like the rest of us, you make some bloopers now and then ( I certainly have made my share).
Happy Memorial Day weekend. Thank you to the armed forces, past and present, for keeping us safe