AIG - American International Group

[Mephistopheles]

As I cannot afford the remaining government stake and AIG won't buyback,  I would have like Berkshire to buy it in a private deal. But it will be a public offering finally. I'm surprised Buffett never spoke about AIG as he knows insurance pretty well and it is a big elephant. Is he legally restrained to buy other insurance companies?

 

I could be wrong, but my feeling is that Buffett doesn't invest in insurance companies if he can't control how the float is invested. So he buys them whole, or not at all, and AIG's not an elephant, it's a blue whale.

 

Berkshire is invested in Munich Re, and also owns preferred shares in Swiss Re I believe. I'm just speculating here, but I think the reason Buffett isn't interested in AIG is because it operates at underwriting losses, and that's just not his style.

[Liberty]

Berkshire is invested in Munich Re, and also owns preferred shares in Swiss Re I believe. I'm just speculating here, but I think the reason Buffett isn't interested in AIG is because it operates at underwriting losses, and that's just not his style.

 

Good point, I forgot about those. He could still have been trying to buy Munich whole and just not had the right opportunity yet, though...

 

As for AIG, it could be the underwriting. Or maybe he just really doesn't like life insurance? Anyone knows if Buffett has ever touched it? It's now a smaller, but still significant part of AIG.

[Uccmal]

Its a done deal and the stock is up. 

[mankap]

Bloomberg confirms that the sale price is 32.50.

Also treasury will have 2.7m warrants after the share sale.I think that this is good news.The warrant count is lower than what I was expecting.

 

http://www.bloomberg.com/news/2012-12-11/u-s-profit-on-aig-climbs-to-22-7-billion-on-share-sale.html

[fareastwarriors]

There was no sell off for me to buy more =(

[FrankArabia]

I was looking to pick up a decent size today too......guess the market is smarter than we thought....oh well, in two months time, maybe there will be another deal to be had....so very disappointed.....

[gfp]

As I cannot afford the remaining government stake and AIG won't buyback,  I would have like Berkshire to buy it in a private deal. But it will be a public offering finally. I'm surprised Buffett never spoke about AIG as he knows insurance pretty well and it is a big elephant. Is he legally restrained to buy other insurance companies?

 

I could be wrong, but my feeling is that Buffett doesn't invest in insurance companies if he can't control how the float is invested. So he buys them whole, or not at all, and AIG's not an elephant, it's a blue whale.

 

 

Berkshire is invested in Munich Re, and also owns preferred shares in Swiss Re I believe. I'm just speculating here, but I think the reason Buffett isn't interested in AIG is because it operates at underwriting losses, and that's just not his style.

 

 

AIG has a poison pill to protect their tax loss carry-forwards.  Berkshire would not be able to build a meaningful stake and significant tax assets would be lost if he bid for the entire company.

 

Also, Berkshire no longer holds the convertible preffered instruments in Swiss Re - they were redeemed at a huge profit.  Berkshire holds multi billion dollar common positions in both Swiss Re and Munich Re.

 

[MrB]

Feel free to suggest Ben as a guest to the Charlie Rose producers.

 

charlierose at pbs.org

 

I just sent them the following.

 

Dear Producers,

Bob Benmosche more or less completed the most significant turnaround in US taxpayer history. Thereby saving one of the oldest and most significant insurance brands in the world and achieved this whilst while suffering from life threatening cancer.

Surely he will be a good candidate to interview on your show?

 

I attached a recent New York Magazine article for your perusal. 

[returnonmycapital]

Feel free to suggest Ben as a guest to the Charlie Rose producers.

 

charlierose at pbs.org

 

I just sent them the following.

 

Dear Producers,

Bob Benmosche more or less completed the most significant turnaround in US taxpayer history. Thereby saving one of the oldest and most significant insurance brands in the world and achieved this whilst while suffering from life threatening cancer.

Surely he will be a good candidate to interview on your show?

 

I attached a recent New York Magazine article for your perusal. 

 

What about Time's Person of the Year?

[MrB]

Wonder what the odds are the deal gets blocked. Airlines used to be strategic industries and the US government is heavily involved in the financing side EXIM/Boeing. So not sure it will be plain sailing.

 

 

http://www.businessinsider.com/aig-sells-plane-leasing-unit-to-chinese-2012-12

"This will be one of the biggest acquisitions of an American company by Chinese investors in history. That said, expect a lot of scrutiny from Chinese and American regulators."

 

 

[ERICOPOLY]

I had to join the rally today.  Too bad I didn't buy yesterday.

[Liberty]

Glad I bought a full position in AIG yesterday morning. But guys, don't buy too soon, now that I'm in it'll tank 30-40% any day now  :P

[shalab]

Eric - did you buy common or warrants? Looks like the commons are more interesting now.

[ERICOPOLY]

Eric - did you buy common or warrants? Looks like the commons are more interesting now.

 

Calls, 2015

[fareastwarriors]

http://www.bloomberg.com/news/2012-12-11/aig-bailout-exit-no-finish-line-as-ceo-narrows-focus.html

 

AIG Bailout Exit No Finish Line as CEO Narrows Focus

[MYDemaray]

More streamlining: White Mountains said its specialist runoff acquisition unit has signed an agreement to buy American Fuji Fire and Marine Insurance Co from AIG.

 

http://www.reuters.com/article/2012/12/11/whitemountain-aig-idUSL4N09L6B820121211?feedType=RSS&feedName=financialsSector&rpc=43

[Guest Dazel]

 

We sold our BAC position a few days ago and rotated Some into  AIG...all common in both...

We went from being afraid of litigation at BAC...to enjoying the AIG lawsuit against BAC...funny world.

 

Dazel.

[kevin4u2]

I have questions for the masses who have invested in AIG.  I have read the financials and they have cleaned them up quite a bit, given where they were. I agree it's likely a buy but it doesn't appear that fantastic to me.

 

My questions:

 

AIG is predominately an insurance company and most all other insurers are in the toilet. Why does everyone think AIG is worth a premium to book? AIG used to sell for 2x book back when they were doing stupid things to inflate profits. Many insurers are selling well below book value.  Even Bruce B's presentation verifies this. 

 

Second, they underwrite at a almost a constant loss. 2004, 2005, 2008-2013 are all underwriting loss years. To me the insurance business here is subpar, so again why a huge premium?

 

Third, what kind of ROE can they earn?  Valueline estimates 5-6%. That won't get you a premium valuation. Between 2002-2007 they earned between 10% and 15.2%. Given they were inflating profits during that time what's to be excited about?  Low bond yields aren't helping insurers. 

 

Lastly they do have DTAs to shield income. That is a benefit. Around $25 billion if I recall correctly.

 

Are there other unrealized assets I am missing?  I agree that this is low hanging fruit but it's not a premium business.  Bruce Berkowitz thinks they can earn 10% ROE, is that realistic?  So let's say they close the valuation gap on a P/B basis, but that isn't huge upside. 

 

Now the valuation gap should close and if it doesn't they can buy back cheap shares.  The only catch is if the company is buying back cheap shares they remain cheap.

 

Thoughts?  Anyone with a short concise thesis on this one?

[meiroy]

It is true that AIG trades at a discount to book value of about $48. I think it is worth more than that but the stock likely will be depressed till the government sheds its stake in it.

 

I also bought 2015 calls yesterday.

[JRH]

Thoughts?  Anyone with a short concise thesis on this one?

 

Hi Kevin,

 

Lots of good questions, let me answer your last one (quoted above).  I think I'll answer SOME of your others along the way.

 

The short, concise thesis when I bought (early fall of 11 until Feb 12) was that Benmosche was telling the truth - AIG was in no way broken, they could divest non-core businesses, pay back the government, do capital management, and shore up the core insurance businesses.  I honestly thought that was stepping over a one-foot bar when I bought.  I guess you either trusted him or you didn't.  You could call then until now a "transformation" thesis, and I think we're seeing a lot of the final pieces of that right now - final sale of common stock by the Fed, sale of majority of ILFC, potential AIA sales.

 

Buying now necessarily has to be a different thesis.  I am honestly not sure whether they will achieve 10% ROE.  I certainly think it's possible.  I'm personally willing to hold while they 1) finish divesting assets, 2) outline a capital management/return of capital plan going forward, and 3) begin to execute (or not) on increasing their ROE.  As far as a thesis goes, I believe the point is to allow them to press down on the gas pedal and see what happens.  Greater and more positive market visibility on the stock shouldn't hurt, either.

 

In conclusion, I don't disagree with your assessment.  If I think it is a great investment, part of that is that it already has been, and part is that they could still return 30% annualized (more for the warrants) for the next three years if they just earn modest profits and converge to book.  I'm a big fan of buying good returns with upside "risk".

[finetrader]

Thoughts?  Anyone with a short concise thesis on this one?

 

Right now AIG is at ROE~6% by my estimates. This translate in EPS~3.5$/share.

 

But then they have DTA, so in fact they are earning EPS/(1-TAX RATE) = 3.5/(1-0.3)= 5$/share in cash earnings.

 

You do the rest..

[MrB]

I have questions for the masses who have invested in AIG.  I have read the financials and they have cleaned them up quite a bit, given where they were. I agree it's likely a buy but it doesn't appear that fantastic to me.

 

My questions:

 

AIG is predominately an insurance company and most all other insurers are in the toilet. Why does everyone think AIG is worth a premium to book? AIG used to sell for 2x book back when they were doing stupid things to inflate profits. Many insurers are selling well below book value.  Even Bruce B's presentation verifies this. 

 

The opportunity to invest generally presents itself when the industry is in the toilet and companies are trading below book, as it is now. This is a cyclical industry, so the industry makes money and with low barriers to entry, capital flows into the industry, it becomes uneconomical (not meeting cost of capital), destroys value and companies become worth less, which is then reflected in their market values/book values. However, the cycle bottoms when enough capital leaves the industry for the remaining players to become economical again. They become worth more than book value because they exceed cost of capital.

To invest at this point you have to look through the windshield and at some point it looks different to the way it looks in the rear view mirror now. Are we there yet? I don't know.

 

 

Second, they underwrite at a almost a constant loss. 2004, 2005, 2008-2013 are all underwriting loss years. To me the insurance business here is subpar, so again why a huge premium?

 

Correct and that is a good point on which to focus your research. You described the picture in the rear view mirror, but does it square up with what you can see through the windshield? Are things changing on the insurance underwriting side? It boils down to profitable underwriting and shrinking uneconomical business. Is that happening? Peter Hancock changed reporting lines and units are now charged for capital. Look into that and if it convinces you that it will produce the necessary results then the future will look different to the past and book value will be more not less. Old habits die hard, so your conerns are legitimate.

 

 

Third, what kind of ROE can they earn?  Valueline estimates 5-6%. That won't get you a premium valuation. Between 2002-2007 they earned between 10% and 15.2%. Given they were inflating profits during that time what's to be excited about?  Low bond yields aren't helping insurers. 

 

Management's target is 10% by 2015. Your research into the change of underwriting discipline will give you a sense of the probability of management meeting that target. I would trust my own research rather than what valueline says.

Also don't lose sight of the fact that you are investing in a share not the company. It is helpful to think about the whole company when investing, but only up to a point.

 

Most of the value added by management over the last 18 months has been by buying back a significant amount of stock below book value. To illustrate: If I buy out 80% of my partners at 30% of book value, I'm still better off even if book value halved in the period. These guys have the capital allocation down pat, so it is possible that they will ensure you get paid, by not only growing book value, but also buying out your partners when the company is being valued incorrectly. Not many of those managements around.

 

A good place to focus is the proxy statement. It is insightful to see how Hancock, Wintrob et al are being rewarded. Are they correctly incentivized to pull the right levers?

 

You are asking the right questions.

 

 

 

Lastly they do have DTAs to shield income. That is a benefit. Around $25 billion if I recall correctly.

 

Are there other unrealized assets I am missing?  I agree that this is low hanging fruit but it's not a premium business.  Bruce Berkowitz thinks they can earn 10% ROE, is that realistic?  So let's say they close the valuation gap on a P/B basis, but that isn't huge upside. 

 

Now the valuation gap should close and if it doesn't they can buy back cheap shares.  The only catch is if the company is buying back cheap shares they remain cheap.

 

Thoughts?  Anyone with a short concise thesis on this one?

 

The brand. AIG is still by some measures the most valuable insurance brand in the world. Do you think management gets that? Do you think it is significant that they recently dropped the Chartis/SunAmerica brands? I deem it a huge deal. Are they leveraging that brand appropriately? Where are they focusing their efforts to find growth? Emerging markets. Which emerging market do they have the strongest connection with? China. PICC deal? AIG is actually more of a Chinese company, historically/brand wise than anything else. Would you have thought differently about AIG today if I told you it was a Chinese company, with the largest insurance brand in the world, run by US management with numbers you can trust? Well to some extent it is. It is worth pondering how much value there is in the brand/history of AIG.

 

I have no problem with the shares staying low as long as they are buying back shares....even down to Bruce Berkowitz and me. Make my day.

 

Last thought....The first issue to focus on is downside. That is what I like most about AIG....the downside protection and at current prices I am suffeciently compensated to take on the risks alluded to by the thoughtful questions you asked.

[MrB]

Fed Sources Say AIG Has Been Federally Regulated Since September

http://www.propertycasualty360.com/2012/12/11/fed-sources-say-aig-has-been-federally-regulated-s?utm_source=PC360DailyeNews&utm_medium=eNL&utm_campaign=PC360_eNLs

[FrankArabia]

someone please correct me if I am wrong.

 

I cannot find a single meaningful metric where AIG has not shown some improvement. This goes from capital, leverage, underwriting, etc. i have also looked at their stats from NAIC/reguatlors perspective and its the same trend, things are improving.

 

Even their annual reports are much better in terms of explaining details.

 

[MrB]

someone please correct me if I am wrong.

 

I cannot find a single meaningful metric where AIG has not shown some improvement. This goes from capital, leverage, underwriting, etc. i have also looked at their stats from NAIC/reguatlors perspective and its the same trend, things are improving.

 

Even their annual reports are much better in terms of explaining details.

 

I have one; P/BV went down.  ;D