AIG - American International Group

[ourkid8]

He is not lying but withholding the truth knowing full well over the next couple of years changes are coming.  The amount of capital SIFI insurance companies will need to hold has not been written or defined yet.  Just use the banks as a proxy for now... 

 

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...

[ourkid8]

Why do banks have to go through rigorous stress test and increased capital requirements yearly to return capital and Insurance companies do not need to?  That's what Paulson/Icahn were essentially saying but let's wait and see. 

 

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.

[Guest wellmont]

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.

 

I believe it's pretty safe to say that this first sentence is pretty obvious bs. it may be true in the moment because aig capital return right now is but a pittance. And their current capital return plan has already been approved by the fed.  but if they tried to return a lot of capital, a big big chunk, they would certainly have to run it by the Fed and would almost certainly get an instant NO.

[Spekulatius]

A single line life insurance company would very likely trade at a very low multiple. I think the same playbook has been tried by activists with HIG a few years ago and it went nowhere. It's not easy to pry out a piece of an insurance company, because insurance is heavily regulated and as I understand by each state they operate in individually. So you look at a regulatory nightmare if you want to spin off parts of AIG. I think management is better focuses on running the various parts better , rather than ripping the holdco apart.

[orthopa]

I can appreciate the DTA argument but there is roughly 13 per share of book value including DTAs and 15B nominal?. Id have to say Id be willing to forgo 5 billion in DTAs in a split up to gain 60% in PPS. The sum of the parts (if their argument/break up is accurate) would give up 5B in exchange for ~35B in market cap in sum of the parts after the split. Am I missing something here?

 

I guess another way to put it would be is losing ~5B in DTAs and risking a credit rating worth no SIFI designation and holding way less cash?

 

Of course there is the risk that sum of the parts are worth no more then the combined entity.

 

In the earnings release BVPS excluding AOCI and DTA is 61.91 per share. Not sure AIG should trade at 1x book with their performance but if so at this price the market isn't giving much credence to the value of the DTAs if they can be monetized in a timely manner.

 

Its trading at .78 times book including DTAs and AOCI and these last 2 years have been painful for shareholders outside of monetizing core assets and the buyback. I'm all for a little shakeup/change. They have been smart/diligent in returning cash via buybacks/increased div but it doesn't take a great CEO/board to decide to do that. Like Icahn says its been a bit of a no "brainer" of a decision. I think cutting costs are a reasonable move too but at what point do we start to underwrite a little better here?

 

Im in the warrants and plan on holding till the end so I have another 5.3 years to watch this play out but imagine it will be painful 5 years if ROE stays low, CR stagnates and managements only action is needling away at costs and the buyback.

[plato1976]

How about to set up a clear path to use up DTA and then split in some years?

Guess the optimal path?

 

I can appreciate the DTA argument but there is roughly 13 per share of book value including DTAs and 15B nominal?. Id have to say Id be willing to forgo 5 billion in DTAs in a split up to gain 60% in PPS. The sum of the parts (if their argument/break up is accurate) would give up 5B in exchange for ~35B in market cap in sum of the parts after the split. Am I missing something here?

 

I guess another way to put it would be is losing ~5B in DTAs and risking a credit rating worth no SIFI designation and holding way less cash?

 

Of course there is the risk that sum of the parts are worth no more then the combined entity.

 

In the earnings release BVPS excluding AOCI and DTA is 61.91 per share. Not sure AIG should trade at 1x book with their performance but if so at this price the market isn't giving much credence to the value of the DTAs if they can be monetized in a timely manner.

 

Its trading at .78 times book including DTAs and AOCI and these last 2 years have been painful for shareholders outside of monetizing core assets and the buyback. I'm all for a little shakeup/change. They have been smart/diligent in returning cash via buybacks/increased div but it doesn't take a great CEO/board to decide to do that. Like Icahn says its been a bit of a no "brainer" of a decision. I think cutting costs are a reasonable move too but at what point do we start to underwrite a little better here?

 

Im in the warrants and plan on holding till the end so I have another 5.3 years to watch this play out but imagine it will be painful 5 years if ROE stays low, CR stagnates and managements only action is needling away at costs and the buyback.

[ourkid8]

That makes sense, create a road map to use DTA'S which we will lose in a split and once those are utilized we split. That way we are maximizing the full value.

 

How about to set up a clear path to use up DTA and then split in some years?

Guess the optimal path?

 

I can appreciate the DTA argument but there is roughly 13 per share of book value including DTAs and 15B nominal?. Id have to say Id be willing to forgo 5 billion in DTAs in a split up to gain 60% in PPS. The sum of the parts (if their argument/break up is accurate) would give up 5B in exchange for ~35B in market cap in sum of the parts after the split. Am I missing something here?

 

I guess another way to put it would be is losing ~5B in DTAs and risking a credit rating worth no SIFI designation and holding way less cash?

 

Of course there is the risk that sum of the parts are worth no more then the combined entity.

 

In the earnings release BVPS excluding AOCI and DTA is 61.91 per share. Not sure AIG should trade at 1x book with their performance but if so at this price the market isn't giving much credence to the value of the DTAs if they can be monetized in a timely manner.

 

Its trading at .78 times book including DTAs and AOCI and these last 2 years have been painful for shareholders outside of monetizing core assets and the buyback. I'm all for a little shakeup/change. They have been smart/diligent in returning cash via buybacks/increased div but it doesn't take a great CEO/board to decide to do that. Like Icahn says its been a bit of a no "brainer" of a decision. I think cutting costs are a reasonable move too but at what point do we start to underwrite a little better here?

 

Im in the warrants and plan on holding till the end so I have another 5.3 years to watch this play out but imagine it will be painful 5 years if ROE stays low, CR stagnates and managements only action is needling away at costs and the buyback.

[fareastwarriors]

Paulson Said to See AIG Unit Sales as Alternative to Breakup

 

http://www.bloomberg.com/news/articles/2015-11-17/paulson-said-to-endorse-aig-unit-sales-as-alternative-to-split

[dutchman]

Anyone have the Bernstein note on aig from today?!  Thanks

[ourkid8]

I enjoying seeing management carve up AIG into a leaner, meaner company.  Does anyone know the size of this business?

 

Market Chatter: American International Group's AIG Advisor Group For Sale

2:40PM ET on Tuesday Nov 17, 2015

02:40 PM EST, 11/17/2015 (MT Newswires) -- American International Group (AIG) is firm after Investment News says the company's Advisor Group is up for sale.

 

AIG Advisor Group recently hired a law firm, which in turn will select an investment bank to begin discussions with interested buyers, according to two sources with knowledge of the company's moves, said the story.

 

"It is possible that today you may see a news story regarding inquiries around a potential sale of AIG Advisor Group," wrote Peter Harbeck, chairman of the Advisor Group, and Erica McGinnis, its CEO, in a memo to advisers Tuesday morning, according to the story.

 

"We are writing to let you know that we are evaluating these inquiries," the memo reportedly said.

 

"Your broker-dealer president will hold a conference call later this week to discuss this in greater detail," the story quoted the memo as saying.

 

Price: 61.04, Change: +0.38, Percent Change: +0.63

[fareastwarriors]

Anyone have the Bernstein note on aig from today?!  Thanks

 

Please see attached.

DOC.PDF

[Spekulatius]

Its trading at .78 times book including DTAs and AOCI and these last 2 years have been painful for shareholders outside of monetizing core assets and the buyback. I'm all for a little shakeup/change. They have been smart/diligent in returning cash via buybacks/increased div but it doesn't take a great CEO/board to decide to do that. Like Icahn says its been a bit of a no "brainer" of a decision. I think cutting costs are a reasonable move too but at what point do we start to underwrite a little better here

 

 

Why has it been painfully to hold AIG stock during the last 2 years. It's performance looks OK to me and slowly but surely, the valuation gap seem to be diminishing. It's a slow melt up, nothing exciting happening here unless with VRX, OCN and other board favorites.

[constructive]

AIG Advisor Group recently hired a law firm, which in turn will select an investment bank to begin discussions with interested buyers, according to two sources with knowledge of the company's moves, said the story.

 

Notice how a more competent organization would have handled a sale directly, without paying exorbitant fees and without immediately leaking it.

[orthopa]

AIG Advisor Group recently hired a law firm, which in turn will select an investment bank to begin discussions with interested buyers, according to two sources with knowledge of the company's moves, said the story.

 

Notice how a more competent organization would have handled a sale directly, without paying exorbitant fees and without immediately leaking it.

 

Do you have a link to the story they are referencing? Thanks

[orthopa]

Its trading at .78 times book including DTAs and AOCI and these last 2 years have been painful for shareholders outside of monetizing core assets and the buyback. I'm all for a little shakeup/change. They have been smart/diligent in returning cash via buybacks/increased div but it doesn't take a great CEO/board to decide to do that. Like Icahn says its been a bit of a no "brainer" of a decision. I think cutting costs are a reasonable move too but at what point do we start to underwrite a little better here

 

 

Why has it been painfully to hold AIG stock during the last 2 years. It's performance looks OK to me and slowly but surely, the valuation gap seem to be diminishing. It's a slow melt up, nothing exciting happening here unless with VRX, OCN and other board favorites.

 

The ROE and Book value growth, and under reserving was what I was referring to.

[fareastwarriors]

Carl Icahn to Solicit Shareholder Support for AIG Breakup

 

http://www.wsj.com/articles/BT-CO-20151123-706371

[orthopa]

Anyone have any thoughts as to why the warrants are trading at a much lower lever compared to when The common was at current levels a little while back?

 

Is the market pricing in loss of time premium due to selling parts of the business?

 

We're the warrants just over valued before or is this an opportunity?

 

In regard to Icahn I can't see involvement hurting shareholders going forward. Only thing is warrant holders may start to lose some time premium if parts of the business are sold as opposed to sold off

[orthopa]

At this point I guess I'm biased that Icahn can only help shareholders. Anyone have thoughts otherwise?

[Rainforesthiker]

At this point I guess I'm biased that Icahn can only help shareholders. Anyone have thoughts otherwise?

 

I agree with you that Icahn seemingly can only help shareholders.  In the past 5 years or so AIG went through a turbulent period to say the least, and they accomplished a lot in terms of removing the government's stake and simplifying their business.  It is natural for management (even though the CEO is new he has been with AIG for a while) to take a deep breath and become complacent.  Icahn is shining a light on this complacency and the need for action to move the company forward.  Regardless of whether AIG splits itself up like Icahn wants, or sells off some  businesses as proposed by others, or just becomes more focused on cutting costs and improving the bottom line, the result almost has to be better than without Icahn's involvement.

[fareastwarriors]

AIG Brawl Could Leave Investors Bruised

 

Carl Icahn’s battle with management has pushed shares higher. But investors should beware of turbulence

 

http://www.wsj.com/articles/aig-brawl-could-leave-investors-bruised-1448644501

[MYDemaray]

AIG mulling sale of life blocks:

 

http://www.bloomberg.com/news/articles/2015-11-27/aig-said-to-mull-sale-of-life-blocks-as-icahn-pushes-for-breakup?cmpid=yhoo.headline

[orthopa]

The cost of leverage looks to be quite low now, ~4.6% and warrants are around 20% lower then they were last time the common was at this price ~3-4 months ago. This isnt accelerated time premium burn with more then 5 years left till expiration is it?

 

Anyone have any imput or insight?

[ourkid8]

Great question as I am also puzzled and have a large warrant position.  Looking back, I should have bought the common instead.

 

The cost of leverage looks to be quite low now, ~4.6% and warrants are around 20% lower then they were last time the common was at this price ~3-4 months ago. This isnt accelerated time premium burn with more then 5 years left till expiration is it?

 

Anyone have any imput or insight?

[rpadebet]

I moved out of warrants to leaps to avoid this effect. Premium burn can be higher from here, check out the other bank warrants and commons from a few years ago.

 

My leaps are expiring next month, so would have to decide again which is better or if this has played out.

[orthopa]

Looks like it maybe a question for Ericopoly. Even though it may not be linear straight line burn would be ~10-12 cents a month over the next 5 years with $6-7 of premium priced in now.

 

Doesnt explain $4 worth in the last 3.5 months.

 

Hopefully ERICOPOLY can chime in.