When Robert Benmosche was named CEO of AIG (AIG), I thought it was a good thing. Ed Liddy, possibly tired of the abuse, wanted to move on. Liddy was primarily skilled with personal lines P&C insurance, which was a small part of AIG, and has been sold off. Benmosche’s skills extend to that — MetLife (MET) has a small personal lines subsidiary, but he has run the largest life insurer in the US. AIG has grown to be as much a life insurer as a P&C insurer, having grown through the acquisitions of Sun America and American General.
Benmosche has his work cut out for him, and it may be an impossible task. Quoting from today’s WSJ article:
As shares of American International Group Inc. continued to ascend Thursday, newly minted Chief Executive Robert Benmosche said he is taking a far more patient approach than his predecessor toward selling assets to repay the government.
He is willing to wait as long as three years, he said, to offer stakes in two multibillion-dollar foreign units that the insurer had been racing to spin off.
“It’s not a question of if, but when,” Mr. Benmosche said in an interview with The Wall Street Journal at his home here. “Once the market gives us a price that I think is fair, we can go forward. … If we sell too soon, everyone loses.”
And the money quote:
After analyzing all of AIG’s businesses, Mr. Benmosche said, he determined the company wouldn’t be able to repay the government even if it sold everything. But he suggested that if he can bolster the businesses before selling off units, the situation might improve.
“The sum of the parts are a little below the whole. The whole has to be big enough to pay back the government, and with a little hard work there will be something left called AIG,” he said.
Okay, so the value of the equity is zero, but maybe AIG can grow out of the situation with government aid, waiting for higher valuations to appear? The article continues:
In May, AIG said it planned to “accelerate” that process for one of the units, American International Assurance Co., which sells life insurance in Asia. AIG hired lead underwriters in June, and the IPO was scheduled for the first quarter of 2010; it was expected to raise more than $5 billion.
Similarly, in July, AIG said it planned to accelerate the IPO for the other unit, American Life Insurance Co., known as Alico, which also sells life insurance overseas.
It isn’t clear how much the businesses are worth, but their value has been eroded by the financial crisis and AIG’s problems. In February, AIG was said to be valuing AIA at $20 billion to $40 billion.
In the interview, Mr. Benmosche said current estimates for what the businesses would fetch were too low.
“That kind of price talk is ridiculous,” he said, without specifying what he considers a fair price. “I’ve told the government that if we have to sell them right now, we may not be able to pay back what we owe.”
Then come the following contradictory statements:
Mr. Benmosche said his primary goal is to repay as soon as possible the government support that is still allowing the company to operate.
“If the U.S. government doesn’t continue to support AIG, we will fail,” he said. “We have no right to use the government funding to make a profit; that is inappropriate.”
Yes, AIG would fail without US Government support. US Government support allows AIG to profit off of its relatively cheap funding base. Benmosche is delaying the sale of units previously slated for quick sale by the prior management, because if valuations recover significantly, there will possibly be some value to share among shareholders.
That’s a big if, though. It is rumored, or rather, alleged by some insurance CEOs that AIG has been aggressively cutting prices in order to gain business for short-term liquidity reasons. After all, if you were an employee of AIG, your largest incentive might be having your salary paid for a few more years, before the reserving catches up. In the short-run, insurance reserving can be gamed. The majority owner, the US Government, has little expertise with such matters. Insurance is a black box to them.
What of AIG’s recent impressive rise in the stock price? Impressive, huh? Maybe.
What, that’s up over 400% from the nadir? Wow. What’s it down from the peak?
I’ll bet you don’t remember when AIG was trading over 1500. Well, I do. At my last firm, I sold our shares of AIG the day it entered the DJIA. We got prices of over $75, which, post the last reverse split, is over $1500 today.
This current rally is fueled by bullish comments from the new CEO, day traders who follow momentum (look at the recent rise in volume in the first graph), and short sellers buying in their positions.
Looking at the middle graph, short-covering isn’t that common yet through 8/14, but the rapid price move since then has likely had some shorts with weak balance sheets covering their trades.
This brings me to my last point regarding AIG for now. Benmosche wants advice from Maurice Raymond “Hank” Greenberg. I don’t know for sure, but I suspect that the two knew each other from their days as CEOs of NYC’s two largest insurers. It wouldn’t surprise me if AIG offered to demutualize and buy MetLife; back in the early ’90s, we tried to do the same thing with The Equitable when it was in trouble. AXA won because it was willing to bet on a real estate recovery, and AIG was not willing to take that chance.
Though Greenberg blames the woes of AIG on incompetent successors, I lay the blame at his feet. If AIG was such a great company, how could it be undone in three years? From the mid-1980s until 2005, leverage at AIG quadrupled. ROE achieved the hallowed 15%/year target, but ROA sagged, which is a better measure for financial services firms.
My last issue here is the accounting. It is rare for companies under financial stress to not have accounting that is liberal. Firms with conservative accounting typically have management cultures that retreat when times are not conducive to low-risk profits.
AIG was an aggressive company during its glory days. They have had their share of reserve restatements, and my own experience with AIG left me skeptical about their balance sheet.
The upshot here is simple. AIG is a leveraged play on the financial sector. If insurance company valuations rise far enough, AIG might have value. AIG common is behaving like a warrant on the underlying assets. But even at present levels, AIG common is worthless. Sell it to the speculators, but watch your own balance sheet; even when a stock is likely to go to zero, it is difficult to manage a short position all of the way to extinction.
With that, be wary. I still believe AIG common is an eventual zero, but it will be very noisy between now and the end. Complicating the matter is the asset inflation the Fed is trying to engender. They want to bail out financial company balance sheets without creating inflation that the average person can notice.