AIG - American International Group

[ourkid8]

AIG Mortgage Spinoff, Sale on the Table.  Let's see what management says on the CC next week. 

 

http://www.wsj.com/articles/aig-mortgage-spinoff-on-the-table-1446156211

[Eye4Valu]

My bad, entire equity position that is. Quite possible regarding redemptions. Do you think he could have found another position that he thinks is cheaper?

[orthopa]

Bruce could be smartly building cash with market near all time highs and 6 year bull run. I do remember reading a conference call of his that he would sell down AIG for redemptions. He probably views the warrants the better option due to leverage going forward relative to the common. Looks like nearly 25% of the portfolio is cash now? Looks like a strategic cash build more then anything else.

 

 

[orthopa]

Unfortunately I don't know enough about insurance companies to say whether or not a split up is feasible. I know there are many cross guarantees that would at a minimum need to be sorted out. If anything I think the best think for shareholders is Ichan lighting a fire under managements ass. They have done a good job buying back stock and buying back debt but ROE and CR improvements have been painfully slow. I like the fact they lay out and are working towards ROE and cost savings goals but at a snails pace.

 

As a warrant holder there is still 5 years and 2 months for management to try to maximize value. If Ichan can speed that up Ill take that. At a minimum I don't see his involvement as a negative. Even if he is in for a quick puff if it maximizes value for warrant holders over time Im ok with that.

 

Lets see what the conference call elucidates. Oh

[zippy1]

Q3 out

https://finance.yahoo.com/news/aig-reports-third-quarter-2015-211500793.html

AIG Reports Third Quarter 2015 Results, $0.5 Billion in Restructuring Charges to Simplify Organization, Improve Efficiency and Rationalize Businesses

After-tax operating income of $691 million or $0.52 per diluted share; net loss of $231 million or $0.18 per share on a reported basis

Restructuring initiatives expected to result in pre-tax restructuring and other costs of approximately $0.5 billion for organizational simplification, operational efficiency and business rationalization, and expected to generate annualized savings of approximately $0.4 billion to $0.5 billion when fully implemented. Results for the third quarter of 2015 include approximately $274 million of pre-tax restructuring and other costs, with the remainder expected to be recognized through 2017

General operating expenses, operating basis (GOE), decreased 6 percent pre-tax for the first nine months of 2015, compared to the same period in 2014

Book value per share, excluding AOCI and DTA, of $61.91 increased 7 percent from the prior-year quarter

Normalized ROE, excluding AOCI and DTA, was 5.9 percent for the third quarter, and 6.9 percent for the first nine months of 2015. Operating ROE, excluding AOCI and DTA, was 3.5 percent for the third quarter, and 7.1 percent for the first nine months of 2015

Approximately $3.7 billion in share repurchases during the quarter; additional repurchases of approximately $602 million through the end of October 2015

On November 2, 2015, AIG’s Board of Directors declared a quarterly dividend of $0.28 per share

Further strengthened the financial flexibility of AIG Parent with distributions received by AIG Parent in the quarter from its insurance company subsidiaries totaling $2.8 billion, consisting of $2.3 billion of dividends and loan repayments, and $503 million of tax sharing payments

 

[orthopa]

Q3 was brutal. If anything strengthens Icahns argument. Only bright spot is buyback.

[ourkid8]

Don't forget the $400-$500/year in cost savings which will be achieved in 2017/2018... I agree, Icahn will have a field day with the quarterly results.  I love it though as he will be giving management the kick in the ass they deserve and hopefully speed things up!!!

 

Q3 was brutal. If anything strengthens Icahns argument. Only bright spot is buyback.

[supertutti]

CEO says no the split, will meet with Icahn to make their point.

 

http://www.wsj.com/articles/aig-ceo-rebuffs-idea-of-breaking-up-company-1446559050

 

At this point, seems like they want to continue to just keep doing the same things, and somehow just cutting costs will improve their struggling business. While it trades under "book value", still not enough for me to get into this yet. Just don't trust management.

[ourkid8]

What don't you trust about management? Benmoche has arguably accomplished the greatest turnarounds in corporate America and Hancock has just been given the company about a year ago and returned a significant amount of cash to shareholders.  Yes, he has been a bit slow at cutting cost and improving metrics but I definitely see no reason not to trust management.  They just need to add a sense of urgency!

 

Just don't trust management.

[supertutti]

Sorry, poorly worded. I don't mean I don't trust them to run the business, I just don't trust them to maximize shareholder value and really trigger growth going forward. They dug themselves out of quite a hole, totally agree. But looking to the future, I haven't seen much that makes me think they can grow other than through cost cutting and some further divestures.

 

What don't you trust about management? Benmoche has arguably accomplished the greatest turnarounds in corporate America and Hancock has just been given the company about a year ago and returned a significant amount of cash to shareholders.  Yes, he has been a bit slow at cutting cost and improving metrics but I definitely see no reason not to trust management.  They just need to add a sense of urgency!

 

Just don't trust management.

[valueyoda]

It doesn't take a genius to buy back shares when AIG has excess capital at the holding company and generates ongoing FCF and the stock trades at a discount to book value, but it does take managerial talent to turn around the insurance operations.

[ourkid8]

Exactly and as we saw with Fairfax, it does take time.  Since Carl Ichan is in the mix, it will create a sense of urgency. 

 

It doesn't take a genius to buy back shares when AIG has excess capital at the holding company and generates ongoing FCF and the stock trades at a discount to book value, but it does take managerial talent to turn around the insurance operations.

[Cardboard]

Carl is right. Being as big as they are automatically puts them under SIFI. Then how can you compete with Chubb and the rest? Forget about decent ROE`s with the Fed forcing you to hold crazy amounts of capital. It is the derivatives stupid! Not the amount of capital that took them down.

 

Moreover, I can`t see the operational benefit of property casualty insurance, life insurance and annuities/investments under the same house. That is not even mentioning the mortgage business. None of them has the same liability maturities, risk profile. Claims, database, actuarial tables are completely different.

 

The only benefits seem to be the ability to be all selling under the AIG brand, which I guess has some value, and having one headquarter.

 

I can`t see why these businesses could not continue using the AIG name once split and I think that a very big HQ makes for waste and bureaucracy.

 

Cardboard

[ourkid8]

I think the main issue right now is the DTA's + the fact the rating agency considers AIG lower risk as a conglomerate. Management needs to continue to use up the DTA'S while improving our credit rating. Once those two factors are met, breaking up makes sense!

 

 

Carl is right. Being as big as they are automatically puts them under SIFI. Then how can you compete with Chubb and the rest? Forget about decent ROE`s with the Fed forcing you to hold crazy amounts of capital. It is the derivatives stupid! Not the amount of capital that took them down.

 

Moreover, I can`t see the operational benefit of property casualty insurance, life insurance and annuities/investments under the same house. That is not even mentioning the mortgage business. None of them has the same liability maturities, risk profile. Claims, database, actuarial tables are completely different.

 

The only benefits seem to be the ability to be all selling under the AIG brand, which I guess has some value, and having one headquarter.

 

I can`t see why these businesses could not continue using the AIG name once split and I think that a very big HQ makes for waste and bureaucracy.

 

Cardboard

[ourkid8]

The outcomes I see after the meeting with PH and Icahn is the following:

 

1. PH will cut additional costs and larger share repurchase, however is that enough for Icahn?

2. Icahn request a board seat

3.  Ichan to launch a proxy contest to throw out the BOD which I highly doubt would succeed with the intention of splitting up AIG.

 

I think Icahn will ask for #1 and #2 at yesterday's meeting. The DTA's are extremely valuable.

 

[racemize]

Peter repeated over and over that breaking up life and P&C would be a huge ratings agency issue right now, and would require more capital because of the change.  He said that the Ratings Agency just want to see consistency in structure and results.  That plus the DTAs indicates to me that they should stay together.

[ourkid8]

I agree as I mentioned above HOWEVER based on Paulson's response to the earnings call, that is definitely not enough.

 

Peter repeated over and over that breaking up life and P&C would be a huge ratings agency issue right now, and would require more capital because of the change.  He said that the Ratings Agency just want to see consistency in structure and results.  That plus the DTAs indicates to me that they should stay together.

[racemize]

I agree as I mentioned above HOWEVER based on Paulson's response to the earnings call, that is definitely not enough.

 

Peter repeated over and over that breaking up life and P&C would be a huge ratings agency issue right now, and would require more capital because of the change.  He said that the Ratings Agency just want to see consistency in structure and results.  That plus the DTAs indicates to me that they should stay together.

 

I don't understand what you mean by "that is definitely not enough"?  You mean actions?  I'm not saying they shouldn't improve companies, just that the split doesn't make sense.  If they have to increase capital on split, then they will have lower ROEs/returns.

[Guest wellmont]

Peter repeated over and over that breaking up life and P&C would be a huge ratings agency issue right now, and would require more capital because of the change.  He said that the Ratings Agency just want to see consistency in structure and results.  That plus the DTAs indicates to me that they should stay together.

 

this is actually exactly what you would expect an entrenched defensive CEO to say who does not want to embark on a plan that would reduce his dominion. this is par for the course for a CEO who is facing an activist that wants him to do something he does not want to do. So we will see where this goes. But when I look at AIG it reminds me of AFLAC. i.e. it's a sitting Duck.

[ourkid8]

The amount of capital each insurer has to hold has not been defined.  If you look at the banks, look at the gong show they are going through and we can bet once the rules are written it will be similar to the banks.

 

http://www.valuewalk.com/2015/11/aig-paulson/

 

Paulson & Co’s response to AIG CEO’s statement

 

In response to Mr. Hancock, Charles Murphy, a partner at Paulson & Co said AIG’s” status quo is not acceptable” citing the fact that its third-quarter financial results were worse-than-expected.

 

“AIG’s results were very disappointing. The company’s “poor results are not an industry problem but unique to AIG, said Mr. Murphy.

 

He pointed out that the company’s return on equity in the mid-single digits was significantly lower than the performance of its competitors including ACE Limited, Chubb Corp, and Travelers Companies.

 

Paulson & Co. has little confidence in the management, strategy, and structure of AIG, according to Mr. Murphy. He added that the insurance giant is“slow moving, difficult to manage, high cost and inherently complex.”

 

John Paulson, the hedge fund manager of Paulson & Co. previously stated that

“AIG is frankly overdue in following in the footsteps of all other major multi-lines in breaking up Life and P&C into separate companies.”

 

Mr. Paulson believed that AIG could, buyback stocks, reduce unnecessary costs and operate at average industry returns by separating into three independent companies. He projected that AIG’s stock price could increase as much as $100 per share from its current trading price at around $6 per share.

[racemize]

Peter repeated over and over that breaking up life and P&C would be a huge ratings agency issue right now, and would require more capital because of the change.  He said that the Ratings Agency just want to see consistency in structure and results.  That plus the DTAs indicates to me that they should stay together.

 

this is actually exactly what you would expect an entrenched defensive CEO to say who does not want to embark on a plan that would reduce his dominion. this is par for the course for a CEO who is facing an activist that wants him to do something he does not want to do. So we will see where this goes. But when I look at AIG it reminds me of AFLAC. i.e. it's a sitting Duck.

 

So, are you saying he's lying about the increased capital requirements from the rating agency?  If the combined entity holds less capital, and splitting it up causes more capital and causes a loss of 1/3 of DTAs, I don't see how it isn't value-destructive.  The market might give the two separate entities higher multiples irrationally, but the move would not be in the best interest of value, right?

 

By all means, improvements at the companies should happen, but I'm just not understanding this split-up talk, unless Hancock is lying.

 

Edit: Didn't the ratings agency rate the split negatively too?

[Guest wellmont]

2 pretty smart guys think they can make it work. others have split and it worked out very well. I don't take everything a ceo says at face value. in fact I rarely listen to them unless they have Significant skin in the game. I think he's stalling right now. he would have to after such a dismal quarter. but my bet is that this company will begin the process of breaking into 3 pieces by end of next year. why would you even want to manage such a complex company? why would you even want SIFI designation? Why keep this company together and impose risk on the system and taxpayers?

[ourkid8]

Forget about the insurance industry, let's look at the banks as the regulation has already been written and constant additional capital requirements are being added.  The SIFI designation that is currently on the major banks (BAC, C, JPM etc), does that force them to have MORE or LESS capital then the non-SIFI banks? 

 

Peter repeated over and over that breaking up life and P&C would be a huge ratings agency issue right now, and would require more capital because of the change.  He said that the Ratings Agency just want to see consistency in structure and results.  That plus the DTAs indicates to me that they should stay together.

 

this is actually exactly what you would expect an entrenched defensive CEO to say who does not want to embark on a plan that would reduce his dominion. this is par for the course for a CEO who is facing an activist that wants him to do something he does not want to do. So we will see where this goes. But when I look at AIG it reminds me of AFLAC. i.e. it's a sitting Duck.

 

So, are you saying he's lying about the increased capital requirements from the rating agency?  If the combined entity holds less capital, and splitting it up causes more capital and causes a loss of 1/3 of DTAs, I don't see how it isn't value-destructive.  The market might give the two separate entities higher multiples irrationally, but the move would not be in the best interest of value, right?

 

By all means, improvements at the companies should happen, but I'm just not understanding this split-up talk, unless Hancock is lying.

 

Edit: Didn't the ratings agency rate the split negatively too?

[racemize]

Forget about the insurance industry, let's look at the banks as the regulation has already been written and constant additional capital requirements are being added.  The SIFI designation that is currently on the major banks (BAC, C, JPM etc), does that force them to have MORE or LESS capital then the non-SIFI banks? 

 

Peter repeated over and over that breaking up life and P&C would be a huge ratings agency issue right now, and would require more capital because of the change.  He said that the Ratings Agency just want to see consistency in structure and results.  That plus the DTAs indicates to me that they should stay together.

 

this is actually exactly what you would expect an entrenched defensive CEO to say who does not want to embark on a plan that would reduce his dominion. this is par for the course for a CEO who is facing an activist that wants him to do something he does not want to do. So we will see where this goes. But when I look at AIG it reminds me of AFLAC. i.e. it's a sitting Duck.

 

So, are you saying he's lying about the increased capital requirements from the rating agency?  If the combined entity holds less capital, and splitting it up causes more capital and causes a loss of 1/3 of DTAs, I don't see how it isn't value-destructive.  The market might give the two separate entities higher multiples irrationally, but the move would not be in the best interest of value, right?

 

By all means, improvements at the companies should happen, but I'm just not understanding this split-up talk, unless Hancock is lying.

 

Edit: Didn't the ratings agency rate the split negatively too?

 

Ok, but that would mean that Peter was blatantly lying on the call.  He explicitly stated that SIFI is not the limiting constraint, capital-wise.  If all of his statements are lies, then I agree...

[racemize]

Here's the quote from Peter:

 

Jay Arman Cohen - Bank of America Merrill Lynch

Other question for Peter. Peter, you mentioned that being designated as SIFI has not held you back from repurchasing shares. At the same time I would suspect that that designation has caused AIG to hold excess capital, simply because you don't understand what the actual rules are going to be, as they haven't been fully announced yet. Is that the case? Are you holding some excess capital than you normally would have because of the SIFI designation?

 

Peter D. Hancock - President and Chief Executive Officer

The answer is definitively no. I think that the right way to look at this if you – we are among about 30 SIFIs, banks and non-banks. And we anticipated this designation before we exited the government's cradle. And therefore executed massive deleveraging and divestitures of precisely the activities which the SIFI regulations were designed to eliminate.

 

So whether it's ILFC, whether it's American General Finance, or other activities, our Consumer finance businesses, which required short-term funding. So we don't have run risk in terms of short-term obli's(32:56). We eliminated the derivatives book.

 

So unlike other SIFIs that are today in a deleveraging and divestiture mode, we got that done by the end of 2011. So it's simply not the binding constraint. The rating agencies are the critical binding constraint that governs our buyback pace. And the longer they get comfortable with the stability of our operating model and our ability to execute on it, the more and more they will give us capacity to use capital more efficiently than we have in the past. But it's definitively not either current or anticipated SIFI capital rules.

 

Jay Arman Cohen - Bank of America Merrill Lynch

Great. Thanks for the answer.

 

John M. Nadel - Piper Jaffray & Co (Broker)

Okay. Understood. Thank you. And then one last one. And that's just on the Fed and SIFI and capital standards and how you're being governed today. I mean for a number of years – and Bob [benmosche] used to talk about the embracement of the Fed and their involvement in effectively everything you guys do.

 

I'm just trying to understand what is it at this point? Do they give tacit approval of your capital actions? And if they do, Peter, what is it based off of? What's the – what are the primary couple of metrics that we can look at, at least today, that give us a sense for what the Fed is looking at?

 

Peter D. Hancock - President and Chief Executive Officer

Well as I mentioned earlier the Fed and any anticipated rules that they may come up with from a capital perspective have absolutely no bearing on our capital returns. The one area where I'd say that they are watching very carefully is to make sure that our internal governance process is up to the highest possible standards.

 

So that when we do decide to take capital actions that that is not management shooting from the hip, it's management documenting why they decided to do what they do, getting the board fully onboard with that decision, and documenting their board's approval. So it's our own true north of what we think makes sense.

 

And as I mentioned in the earlier question the binding constraint today is the attitude of the rating agencies. And so where we have incurred additional compliance costs as a result of the Fed's involvement, it's around improving governance and operational risk as opposed to capital.

 

As I mentioned earlier we de-levered the company and simplified the risk profile so much.

 

John M. Nadel - Piper Jaffray & Co (Broker)

Yeah.

 

Peter D. Hancock - President and Chief Executive Officer

In order to exit early from the government's assistance program, that it just simply, not an issue for us. It's a huge issue for others, and that's why this issue gets so much public discussion. They haven't de-levered their balance sheets yet.

 

John M. Nadel - Piper Jaffray & Co (Broker)

Okay. And then lastly I know – just following up on the rating agency as sort of the primary governor. Obviously one quarter doesn't necessarily change things too dramatically. But do you think the rating agencies buy into a bunch of the adjustments that you guys are citing here when it comes to thinking about interest coverage?

 

Peter D. Hancock - President and Chief Executive Officer

I think that interest coverage has been an issue in the past. I think that we've done a lot to change the debt profile by replacing high coupon debt with fresh low coupon debt. But most importantly replacing short term debt with very long term debt. So today we have very little exposure to refinancing risk at all.

 

And the other thing is that we make less and less of a distinction between financial and operating leverage. Some of our key competitors have perhaps better interest coverage ratio, but a whole lot more leverage in their operating companies than we do.

 

So I think that there's no single ratio that the rating agencies fixate on. It's a broader set of issues that they look at in terms of our risk management governance and our commitment to using the right kind of criteria for prioritizing business in terms of looking at risk adjusted returns as opposed to simply volume. So the value versus volume is starting to take root in the culture of the company in a way that I think is being noticed by the rating agencies.

 

But the biggest issue with the rating agencies is seeing a longer track record of stability in the group structure. We had to massively overcapitalize the company in the immediate emergence from the Fed assistance, as a result of the fact that there was no track record of the group as it stood. We had sold so many companies in the immediate aftermath that they wanted to see some stability.

 

And so that's why it's very important that we maintain a steady process of simplification, as opposed to any radical abruptness, which is simply attract more capital against the uncertainties.