AIG - American International Group

[zhengmit]

Not sure if everybody still follows the story.  I thought warrant might double from current level.  Has anybody looked at Berkshire disclosure?  What are initial deferred charge assets? How to think about adding $1.8bn reserves from Berkshire side?  I looked at Morgan Stanley's notes on it and thought he is simply wrong.  Any expert opinion?

[fareastwarriors]

Anyone still in AIG?

 

https://www.reuters.com/article/us-financial-crisis2008-aig/after-its-near-death-aig-ceo-plots-revival-by-returning-to-basics-idUSKCN1LQ15Y

 

After its near-death, AIG CEO plots revival by returning to basics

[plato1976]

why is this one still dropping everyday even as the rate climbs up?

Changing CEO seems not working immediately --- the warrants will expire in 2 years and are approaching the worthless level

[Spekulatius]

The latest drop is probably due to the recent hurricanes, other re-insurance companies are down too. I own quite a bit of AXS and RE in addition to Fairfax and BRK. I sold AIG after they announced an acquisition at a multiple above book (1.3x ? I don’t remember) while trading below tangible book. At that point, I new my thesis was broken. That was around $60/ share. Below $50, this gets interesting again, but I think I rather stick with adding to my existing holdings in the same sector.

[Sullivcd]

Validus synergies really starting to kick in. These guys are literally the worst

[Gregmal]

This is a dumpster fire. While I once loved this and did very well with the investment, deciding to sell the day Bob left was a great move. This is just a horribly run company, with a brand that isn't what it once was, and destroying so much value in the process. That and it seems anyone worth a dime at AIG is either poached by Berkshire or leaves for anyway.

[Cigarbutt]

When a stock goes down and it's mostly a temporary and fixable issue, it may make a lot of sense to buy.

Not here though IMO.

 

Property casualty insurers are like banks, in a way, in the sense that they typically have a block box component that is very hard to figure out even if one dissects the reserve triangles and in the sense that there is a trust component related to the fact that the reality of the balance sheet numbers will only be discovered over a relatively long period. Based on its historical record, reported numbers and industry dynamics, I expect AIG to do poorly on an absolute and relative basis.

 

Reviewing the numbers at AIG is a sore reminder that the (re)insurance industry as a whole is struggling to achieve strong returns. Why is that?

 

AIG was bailed out based on a liquidity event and further developments showed that the solvency issue, although very significant, was only relative. This relative solvency issue however IMO is at the root of AIG's travails and the industry's idleness.

 

When one looks at the overall "return" on the bailout "investment", some report a positive number. The more conservative include an opportunity cost with a very narrow definition. I would offer the opinion that saving AIG was the right thing to do but the following unintended consequence of zombie survivals has, so far, not been appreciated fully.

https://fas.org/sgp/crs/misc/R42953.pdf

 

"CBO does not, however, regularly perform cost estimates on Federal Reserve actions."

Perhaps somebody should.

[Sunrider]

So at what point does this / the warrants become attractive again. If I recall the discussion here correctly, the BV is still somewhere around 70, so the last months' drop seems a bit excessive, unless you think their numbers are completely made up?

 

[valueyoda]

I don't get it why you are interested in the warrants at this point, when you can replace the warrants with Leaps for a far lower price (even when you take into account a strike price reduction due to excess dividends).  The LEAPS are getting interesting though, even though AIG's operational performance has been poor for years now.

[indirect]

Warrants has volume, Leaps doesn't

[Cigarbutt]

So, the question is: Can AIG turn the corner?

The company says yes and good things are on the way.

But which corner are we talking about?

 

Recently AIG "pre"-announced some poor results which point to a mix of retention reaching their limits and covers running out. Q4 will be interesting to dissect.

https://www.reuters.com/article/us-aig-ceo-outlook/aig-hit-with-750-million-to-800-million-in-fourth-quarter-catastrophe-losses-ceo-idUSKBN1O41ZO

 

A way to assess turnarounds is to try evaluating the culture.

A few days ago, AIG quietly returned to the CLO market. 500M is pocket change for them in their portfolios but this alone tells me that AIG may become an interesting opportunity but at much lower levels.

https://www.thinkadvisor.com/2018/12/12/aig-returns-to-clo-market-with-first-post-crisis-d/

 

 

[NBL0303]

Why do you all think that AIG has gone down so much since their quarterly report?

[Sullivcd]

Cut in half in a month

[aryadhana]

Trading quite a bit below even adjusted tangible equity (removing their tax asset), at discounts that have never persisted.  Sounds like a good portion of proceeds from the sale of Fortitude could be used for share repurchases.  Performance since February has been pretty similar to Prudential -- each down about 60 percent on March 23, 20 & 25 percent on June 8 -- until the last week where AIG has been down a lot more (now AIG is off its February levels by about 40 percent, compared to 30 for PRU). Price to adjusted book has usually been between 0.90 and 1.05, and is about 0.58 today.  I guess the discount is some combo of: (i) belief they are substantially underreserved or mismarking assets and (ii) ROE will deteriorate going forward due to low interest rates.  On (ii), here's what Brian said on the earnings call:

 

However, wider risk-adjusted credit spreads should generate opportunities to attract new business as profitable margins and the reinvestment of assets slowing off the portfolio should benefit from higher credit spreads.

 

We have updated our estimates of market sensitivities to reflect our balance sheet as of the end of the first quarter. We would expect a plus or minus 1% change in equity market returns to respectively increase or decrease adjusted pretax income by approximately $25 million to $35 million annually and a plus or minus 10 basis point movement in 10-year treasury rates to respectively increase or decrease earnings by approximately $5 million to $15 million annually.

 

These sensitivities assume the immediate impact of market movements on reserves, fact and fair value option securities as well as investment income and other items. It is important to note that these market sensitivity ranges are not exact nor linear since our earnings are also impacted by the timing and degree of movements as well as other factors.

 

Market conditions began to improve in April, but one can expect that should conditions continue to improve, there may be immediate benefits in reserves back for investments in the second quarter although these benefits are likely to be offset slightly by lower private equity returns that are reported on a one quarter lag.

 

The 10-year treasury yields are up about 5 bps since the balance sheet date and down about 80 bps since February.  Market is up by about 25 percent but I can't exactly tell what the effect there is (they don't have much direct equity exposure).  All in all, can't parse what this means for earnings going forward but doesn't seem like it should drastically impact future earnings. 

 

Any thoughts here?  Seems like catalysts could be a good hurricane season (or a plan to return a lot of money with share repurchases and a dividend increase, but don't see that happening even if it would be a good idea).

 

[aryadhana]

Right now the warrants cost about $0.85 for a strike of $42.4734/share for 1.061 shares of AIG.  Dividends paid by the time the warrants expire on 1/19/21 will bring the strike down to about $42 and the multiplier up to 1.07 or so; the exact numbers depend on AIG's share price on the record date.  The $42 1/15/21 calls cost $0.60 meaning they trade at a 25% discount to a substantially equivalent security, even accounting for adjustments to the warrant (which adjustments, by the way, are taxable distributions to the warrant holders). 

 

I can't fathom why this discount exists.  It can't be the 6 extra days.  I suppose there is the terrifying possibility that AIG makes some extremely generous amendments to the warrant giving holders a later exercise date for a lower exercise price, but I can't imagine how this would be consistent with a fiduciary duty to the common stockholders. 

[samwise]

Wouldn’t you rather own a longer dated LEAP now?

 

Do you have any views on the quality of the company? The market hasn’t given them any credit for the supposed improvements they have done in the last 2-3 years. Everything they did makes sense to me from a portfolio construction standpoint. But only recently was it showing up in the combined ratios.

 

 

[aryadhana]

Wouldn’t you rather own a longer dated LEAP now?

 

Do you have any views on the quality of the company? The market hasn’t given them any credit for the supposed improvements they have done in the last 2-3 years. Everything they did makes sense to me from a portfolio construction standpoint. But only recently was it showing up in the combined ratios.

 

Well at the moment I'm long the calls and short the warrants in what I think is a pretty riskless trade.  The LEAPs look pretty good.  I thought even the warrants looked pretty good but clearly I was wrong.  My thinking was that this should be worth at least 75 percent of tangible book value plus AOCI and certainly well over 50 percent of book value.  But it's not like I have any special insights on the business itself, and it's a big, well-followed company with intractable financial statements.

 

Stock would probably be up to at least $50 or more if the CEO said "I am weighing every decision we make down to what we spend on air conditioning against repurchasing shares for half of what they are worth.  So we commit to releasing whatever invested capital we can by selling off business units at any discount, and reinsuring tail risk at any premium, that enables our repurchasing shares at an even larger discount to the intrinsic value of what is left.  Obviously we would still try to sell at a premium and reinsure at a discount.  We commit to reporting any failure to sell at an acceptable price to intelligent buyers with serious intentions as prima facie evidence of hidden assets impaired or liabilities incurred.  We commit to selling or reinsuring those lines of business we would dispose at our current share price even if it trades up after this announcement and distributing what we cannot sell as a special dividend before the end of 2021." 

 

Talking about growing an insurance business trading way below book does not strike me as very shareholder friendly and yet that's where we are.  Who cares if they have to borderline liquidate themselves in the process?

[samwise]

Sounds like the plan from the last CEO. The one who got fired by the board and replaced with the current one. You see why he wouldn’t be incentivized to follow the same plan.

 

This was operationally a terrible company, which is why it traded at low p/b. Seems like a reasonable option to fix those operations, specially since it is more easily fixed than bad products and factories: all insurance contracts get renewed periodically, and the past was wiped clean with Berkshire. They have replaced a lot of the legacy staff and underwriters, since culture was considered one of the problems here.

 

None of the above means this is a good investment. The industry isn’t good, and the current pandemic is bad for insurers. But AIG might be improving operationally.

 

No position currently, but might buy leaps at some point.

[zhengmit]

Long date LEAP owner here.  Given the news of life divestment, what happened to call option?  It is used to be based on AIG stock price (inherently some P/B multiple) and now a big chunk of book is divested.  Shall I sell now?