AIG - American International Group

[Guest wellmont]

with all due respect, it seems to me you're assuming the next 4 years are going to be like the last 1 year. it's linear thinking. This is a stock that is either going to get back to earning a decent ROE or it is going to get broken up into three pieces. I will pretty much bet a lot on that. It has no business Not being separated into 3. I suggested months ago that this was the end game for AIG. And I stand by it.

[racemize]

with all due respect, it seems to me you're assuming the next 4 years are going to be like the last 1 year. it's linear thinking. This is a stock that is either going to get back to earning a decent ROE or it is going to get broken up into three pieces. I will pretty much bet a lot on that. It has no business Not being separated into 3. I suggested months ago that this was the end game for AIG. And I stand by it.

 

Well, I guess on the flip side, I don't want to just assume it will all work out magically either.  It is easy to go from 0% ROE to 6% ROE (or should be), getting from 6 to 10+ is much harder, so I think it warrants some amount of skepticism. 

 

Looking at average industry ROE (and not in such a low interest rate environment), >10% doesn't seem to be consistent/common.

 

graphs in the middle of the document:

http://www.aiadc.org/AIAdotNET/docHandler.aspx?DocID=319377

 

slide 9:

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&ved=0CF8QFjAC&url=http%3A%2F%2Fwww.oipa.com%2Fpage_images%2F1296154858.ppt&ei=C81zUujkFuS-2QW-7IHQDw&usg=AFQjCNF2jQiFuE4dfil4i628yu3w9_PyrQ&sig2=-DtfWnY1gt9QTwCkovOpYQ&bvm=bv.55819444,d.b2I

 

 

[Guest wellmont]

aig is not "the industry". it's the largest insurance company by market cap. These are good insurance businesses. It will not be "average". it is less than average now. but it won't be. travelers earns about 10% on equity and trades at a premium to book value. I expect that if AIG does not get to that kind of benchmark, it is going to be broken up like Hartford is being broken up. And if it gets broken up the stock will soar.

 

AIG does not have a control investor. It is ripe for activism. There really is no reason to have these three units together under one umbrella. If the company continues to be mediocre, and trades at a discount to book, there will be effort to change that. There will be effort to get management to raise ROE or break it up. It's a given.

 

The stock is up 37% ytd inclusive of today's drop. Expectations for this stock were too high. Hot money was in it. Hot money is leaving. The stock has done very well. It's dropped all the way back to where it was October 8th. So it gave back less than a month's worth of gains.

 

The new stock market bubble has even value investors "caught up" in the short term performance game.

[nkp007]

Fits and starts. Businesses don't improve linearly.

 

Though they are in fact improving. And they are priced at more than 20% below book so it's not like the expectations are high.

 

Not much to fear here unless I'm missing something.

[racemize]

aig is not "the industry". it's the largest insurance company by market cap. These are good insurance businesses. It will not be "average". it is less than average now. but it won't be. travelers earns about 10% on equity and trades at a premium to book value. I expect that if AIG does not get to that kind of benchmark, it is going to be broken up like Hartford is being broken up. And if it gets broken up the stock will soar.

 

AIG does not have a control investor. It is ripe for activism. There really is no reason to have these three units together under one umbrella. If the company continues to be mediocre, and trades at a discount to book, there will be effort to change that. There will be effort to get management to raise ROE or break it up. It's a given.

 

The stock is up 37% ytd inclusive of today's drop. Expectations for this stock were too high. Hot money was in it. Hot money is leaving. The stock has done very well. It's dropped all the way back to where it was October 8th. So it gave back less than a month's worth of gains.

 

So, perhaps you are misinterpreting what I'm saying--my entire point is that we have to now assume it will be better than industry, which is, to me, a larger leap of faith than before.  I'm not saying it won't happen, just that it requires a bigger assumption on our part.  You say they are "good insurance businesses"--I don't like to just assume they are.  You seem very sure--why?  I hope they are, but I don't want to have to bet solely on that fact, given the history of most insurance companies.

 

The new stock market bubble has even value investors "caught up" in the short term performance game.

 

I do hope that is not in reference to me.  I've said nothing about the current quarter, and in fact, am talking about what will happen over the next 2-5 years.  I'm asking this: Will they be "only" average?  If they are, what are our returns? (ok)  At what price do we need to decide if they will be above-average in order to keep holding? (soonish)

 

Being conservative about future assumptions is not being "caught up in the short term performance game".

 

All that being said, I'm not sure this is very productive, as we've both pointed out what we think about the company.  I'm not even disagreeing with you, I'm just trying to cover the downside.

[Cardboard]

Regarding votes vs weight, I know all too well the song from Buffett. However, votes are really important especially in the financial industry which is all about reputation. If you doubt that, then ask Moynihan why he went to bed with Buffett with a terrible convertible when capital was not at all needed?

 

AIG was a turnaround from dead to alive. Now, it is still a turnaround but, from alive to doing as well if not better as peers. For someone to drive an organization throughout that entire chain of events is extremely rare. Bob probably has the skills, but he is now getting older and is too much associated with the dire past.

 

A split of the business as suggested by Wellmont might be part of the solution. I see very capable leaders in charge of each business at the moment but, I am not at all certain that anyone could lead the full organization.

 

If you doubt that a stigma is still attached to AIG, track daily the percentage variation in the stock vs peers. I see a ton of volatility in AIG and a lot less in other property and casualty stocks or life insurers. Why? This kind of action leads to a lower price to book due to volatility being associated with risk.

 

Value investors keep on saying that results will drive the stock price overtime but, if volatility, reputation, complexity and other qualitative factors remain in place then metrics such as P/E or price to book will be negatively impacted. One way to correct it is for AIG to get out of the news, deliver more consistent and predictable results, be simpler to understand. 

 

I don't think that anything that I am saying has to do with the short term game or being up 37% to date which IMO is truly a mute point if anyone cares about weight. You can be up 60% to date and still be 30% undervalued.

 

Cardboard

[Guest 50centdollars]

What do you guys think of Bob's response to this Goldman Sachs analyst question?

 

Bob, if I could switch to sort of a bigger topic, we all get that you don’t want to provide guidance, and the aspirational goals were stretch goals back in 2010, but you’ve since made a lot of progress against them. And so when you say - I think I’m getting this right - that we’re not sure we’ll get them done by 2015, investors just wonder what to expect.

 

 

And recognizing you’re not going to give guidance, there were, I think, fundamentally three big pieces to the aspirational goals: driving ROE 10%, returning capital of $25 billion to $30 billion, and investing to get some growth and rebuild the franchise. I’m wondering if you could at least give us some directional sort of color on which of these big pieces you think may be at risk.

 

Bob Benmosche - President and CEO

First of all, you’re assuming it’s at risk. What we’re saying is that once we get closer to the time we need to give you maybe a range around it. We’ve discussed a whole lot of things one would have to do once we get closer. Because look, if I could tell you exactly what I could be, at exactly a point in time, I think I would have problems with some of the people in Washington in the enforcement group, because you can’t run this business with that degree of accuracy, and you all know that.

 

What’s important is we look at how we’re running it, what are our focuses on different things within this company, and we have said we’re focusing on expense and we’ve been investing a lot of money to get our expenses down, so we had to spend to eventually see the savings.

 

We’ve talked about our investment portfolios and the things we’re doing there. We talked about making sure we understand our cost of capital for the businesses and the risks we’re taking. And we want to earn more than our cost of capital, especially in the property casualty business, [with its big focus], so that we are capital light on the things that make the most sense for us.

 

So we’re continuing to do all of that. And it all comes together, including capital management. So it’s not a question of anything other than, as you go through all of these things, when we get closer to 2015 you’re going to ask us to be a little bit more specific and instead of an aspiration it becomes we will achieve something around this in this period of time. And that would be guidance, and that’s what we’re concerned about.

 

So we’re focusing on all of it, and we’re proud of the progress we’ve made, and we’re putting a lot of energy into achieving all of it by 2015. But what I’m saying to you today, well in advance of that time, is we may not get there by 2015. It might be a little later.

 

And that’s about all the comment we can make on the whole subject, but I think you need to look at our progress every quarter, look at the trends every quarter, and I think you’ll see a continually improving organization here.

 

 

[Uccmal]

Stock is cheap.  Book value is growing, not shrinking.  Combined Ratios are so/so - makes me wonder about talk of a hard market.

 

Mortgage business is growing well.  Life spreads are stable. 

 

I have been buying today - 2016 Leaps.  Incremental. 

 

These guys issued debt at 3.75%.  How many other companies can do that? 

 

ILFC is temporarily out of anyones control.

 

I think the market is over reacting. 

 

I like the idea of splitting the company up.  B. Ben. while certainly obnoxious seems to be good for AIG.  I am sure he will step down at some point... he did come out of retirement to do this after all. 

[racemize]

I think we talked about this some before, and I can try to go dig through the thread to find it, but does anyone remember the discussion of the effect of split ups on the warrants?  e.g., if we did split into three companies like wellmont is talking about, do the warrants get screwed?

[fareastwarriors]

http://www.bloomberg.com/news/2013-11-01/aig-names-cornell-to-run-bonds-as-schreiber-manages-alternatives.html

 

 

AIG Names Cornell, Schreiber to Investment Posts

[Guest wellmont]

aig is volatile because of hedge fund money in the stock. they got in when government got out. they wanted management to be more aggressive with buybacks and they wanted quicker action on the CR. they aren't getting that. but they got a good return on their money anyway.

 

BB is taking a more measured approach, working on the balance sheet and trying to bring financial stability and strong fundamental structure to aig. now it's end of year and hot money is taking big profits in aig. they are moving on, like sharks. ownership is being transitioned to value oriented mutual funds, pension funds, SWF, and value oriented hedge funds. this process takes time. they can't move as fast as we can. I have noticed it takes big money time to do things. they get in slowly. they get out slowly.

 

The stock is still tainted. there is still rear view mirror investing going on. so it's not getting credit for what it is imo. aig is associated with scandal and the past financial debacle. it takes time to change perceptions. but they will change.

 

to me this is a big dumb low return stock selling below book value. book value is growing. capital is going to be returned. dividend going up. CR coming down. ROE headed higher. Potential activism. I wish for, but don't see a lot of downside, short of a market sell off. I like that warrants are available.

 

this stock was owned by US Gov. They got out fast. And aig is now trying to find the right investor base. it's all very messy at the moment. but as the hot money leaves it should become less and less volatile.

 

big picture is this is a great place to have capital if you are a sensible long term investor who can ignore the noise.

[Guest wellmont]

I think we talked about this some before, and I can try to go dig through the thread to find it, but does anyone remember the discussion of the effect of split ups on the warrants?  e.g., if we did split into three companies like wellmont is talking about, do the warrants get screwed?

 

no they don't. I think we can be informed by what happens to options when there is a corporate spin off.

[racemize]

I think we talked about this some before, and I can try to go dig through the thread to find it, but does anyone remember the discussion of the effect of split ups on the warrants?  e.g., if we did split into three companies like wellmont is talking about, do the warrants get screwed?

 

no they don't. I think we can be informed by what happens to options when there is a corporate spin off.

 

Here's the relevant section of the prospectus:

 

 

3.  If AIG makes a dividend or other distribution to all holders of Common Stock of shares of AIG’s capital stock (other than Common Stock), rights to acquire AIG’s capital stock or evidences of AIG’s indebtedness or assets (excluding any dividend, distribution or issuance covered by paragraphs (1) or (2) above or (4) or (5) below), then the exercise price will be adjusted based on the following formula:

 

EP1 = EP0 x (SP0 − FMV) / SP0

 

where,

 

 

EP0

=   the exercise price in effect at the close of business on the record date

EP1

=   the exercise price in effect immediately after the record date

SP0

=   the Current Market Price as of the record date

FMV

=   the Fair Market Value (as defined below), on the record date, of the shares of capital stock of AIG, rights to acquire capital stock, evidences of indebtedness or assets so distributed, expressed as an amount per share of Common Stock

 

“Fair Market Value” of any property or assets means the fair market value of such property or assets as determined in good faith by AIG’s board of directors (which good faith determination shall be conclusive and binding).

 

However, if the transaction that gives rise to an adjustment pursuant to this paragraph (3) is one pursuant to which the payment of a dividend or other distribution on the Common Stock consists of shares of capital stock of, or similar equity interests in, a subsidiary or other business unit (i.e., a spin-off) that are, or, when issued, will be, traded on a U.S. securities exchange, then the exercise price will instead be adjusted based on the following formula:

 

EP1 = EP0 x MP0 / (FMV0 + MP0)

 

where,

 

 

EP0

=   the exercise price in effect at the close of business on the record date

EP1

=   the exercise price in effect immediately after the record date

FMV0

=   the average of the VWAP (as defined below) of the capital stock or similar equity interests distributed to holders of Common Stock applicable to one share of Common Stock over each of the 10 consecutive trading days commencing on and including the third trading day after the date on which “ex-distribution trading” commences for such dividend or distribution with respect to Common Stock on the NYSE or such other national or regional exchange or market that is at that time the principal market for the Common Stock

MP0

=   the average of the VWAP per share of the Common Stock over each of the 10 consecutive trading days commencing on and including the third trading day after the date on which “ex-distribution trading” commences for such dividend or distribution with respect to Common Stock on the NYSE or such other national or regional exchange or market that is at that time the principal market for the Common Stock

 

“VWAP” per share of such capital stock or similar equity interests on any trading day means the per share volume weighted average price as displayed on Bloomberg (or any successor service) in respect of the period from 9:30 a.m. to 4:00 p.m., New York City time, on the relevant trading day or, if such volume weighted average price is unavailable, VWAP means the market value per share of such capital stock or similar equity interests on such trading day as determined by a nationally recognized independent investment banking firm retained for this purpose by AIG.

[fareastwarriors]

CEO making the rounds at CNBC/Bloomberg

 

http://video.cnbc.com/gallery/?play=1&video=3000212841

 

 

http://www.bloomberg.com/video/aig-gets-50-basis-points-with-mortgages-ceo-8gtSIkL3RtqQ2s~1dJJmRg.html

[Cardboard]

"What do you guys think of Bob's response to this Goldman Sachs analyst question?"

 

This was in my view a really shitty answer and partly why I got so upset today. Achieving 10% ROE by 2015 should be a base goal by now and not at all a stretch goal. These goals were put in place when the company was getting out of life support and owned by the government.

 

You look around at the P&C industry and many are easily in the low 90's for their combined ratio. Where is AIG?

 

So yes, I am getting a little mad at Bob who seems more preoccupied acting like a Chairman and doing a lot of blah blah blah with Bartiromo and other useless news anchors talking about history. I would much rather seem him putting a sense of urgency into his organization to figure out why they are underperforming so badly the likes of Chubb and Travelers. Put a plan in place, execute and becoming a better organization. If that was being done, then 10% ROE by 2015 would look like a silly low target as it should be by now.

 

Cardboard

[indythinker85]

What do others think the fair value of the warrant is?

 

About the same upside as BAC-WTA in my opinion.

 

I keep a TARP warrant spreadsheet that has PNC-WT, JPM-WT, GM-WTB, COF-WT and HIG-WT slightly ahead of those two. Don't own any though.

 

Not looking at the company but this is good in-depth write up on LEAF IMHO http://www.valuewalk.com/2013/11/springleaf-holdings/

[racemize]

New AIG presentation.  Didn't notice anything stand-out in it, but I was skimming.

 

http://www.aig.com/Chartis/internet/US/en/3Q13%20Investor%20Presentation%20FINAL%2011.12.13%20318pm_tcm3171-546894.pdf

[fareastwarriors]

http://www.bloomberg.com/news/2013-11-17/aig-s-ilfc-bidders-said-to-be-in-talks-to-add-backers-to-group.html

 

AIG’s ILFC Bidders Said to Be in Talks to Add Backers to Group

[ourkid8]

I just added more AIG call options.  It's a rather simple strategy:  Improve underwriting, sell ILFC, continue to cut cost and repurchase stock!  This stock is cheap and if they achieve their aspirational goals we will be close to 1x book!

[Liberty]

http://oraclefromomaha.wordpress.com/2013/11/25/aig-tarp-warrants/

 

Writeup on the TARP warrants.

[racemize]

http://oraclefromomaha.wordpress.com/2013/11/25/aig-tarp-warrants/

 

Writeup on the TARP warrants.

 

Pretty good write-up.  However, I don't believe the borrowing cost of the TARP warrants is correct, or at least is not calculated according to my understanding.  I consider the borrowing cost to be how much the common has to go up per year in order to break even on the cost of the warrant, including missed dividends.  Under that definition, the current cost of borrowing is 6.6%, not 4%. 

 

I still agree with the end-result, however.

[abcd]

Did not realize how important that this sale is for Market, till the stock popped more than a dollar in the middle of a bear market day.

 

http://www.bloomberg.com/news/2013-12-12/aig-said-in-sale-talks-with-aercap-on-ilfc-jet-leasing-unit.html?cmpid=yhoo

 

[fareastwarriors]

Well ~4b is not chump change. 8)

 

But I was hoping the prices drop a bit more so I can add to my position.

[Liberty]

Did not realize how important that this sale is for Market, till the stock popped more than a dollar in the middle of a bear market day.

 

http://www.bloomberg.com/news/2013-12-12/aig-said-in-sale-talks-with-aercap-on-ilfc-jet-leasing-unit.html?cmpid=yhoo

 

My understanding is that getting all this off the balance sheett could help with AIG's credit rating, so the impact is bigger than just the money from the sale. How big that impact will be for profitability in practice, I don't know.

[Guest wellmont]

the leasing business is not as good as the other two. it's more volatile and not really a fit. it would be an albatross when credit markets seize up. They can take the money they get by selling it and repurchase stock at a discount in the other two. prior to the sale, they could only take the fcf from the leasing business and buy back stock. now they can take the proceeds from the sale and do it. Bigger buyback potential by selling it. Selling it creates more value than keeping it.