I have a deep admiration for Warren Buffet and follow his moves and his reasoning very closely. Recent Q1 2012 numbers for Berkshire Hathaway (BRK.A) just led me to a quick market-oriented comparison between BRK.A, which contains insurance units as a centerpiece, and AIG (AIG). As AIG reported solid Q1 numbers, even with disregard to the non-cash changes in the fair values of ML III and AIA, so did BRK.A. Indeed BRK.A profited just as well from low catastrophe losses and posted an underwriting profit of $54 billion. Class A shares earned $1,966 compared to $917 a year ago and are now trading at $121.950.
BRK.A, of course, consists to a large degree of companies outside the insurance industry and is better understood as a conglomerate. Since the insurance business is still the core of the company and supplemented by a diversified group of companies ranging from candy producers to home builders, I like to see BRK.A as a form of market proxy. Berkshires book value has steadily grown over the last decades and represents one great example of outperformance. Buffett himself has indicated that Berkshire is more likely to outperform during a down market than during a prolonged up market for the S&P 500, which is not surprising given the large market capitalization of the company. Berkshire has grown book value per share by about 10% a year which stood at around $100.000 at the end of 2011. Compare AIG's book value per share performance next to it, and you will probably side with an investment in Berkshire. Huge value was destroyed as AIG sold massive amounts of CDS and once securities became illiquid, book value plunged from over $800 dollars a share to almost zero. As this is a factual presentation of what has happened to AIGs book value on the one hand, it is also distorting reality to some extent on the other. To put things into perspective, it is better to understand the CDS side-business as one-time failed bets that continue to obscure the true value of the company.
With a book value of around $100.000 dollar and a current market of $121.950 BRK.A trades at a premium of 21%. Analyst and investors have purported target prices of around $150.000-180.000 per class A share which would mark a premium of 50-80% to current book value or 25-50% upside to current market values. Given the average growth rate in book value over the years, I do not see a premium like this in the short-term unless we see more positive indicators and the economy picking up more steam with more people coming in to buy equities. At the same time, AIG trades at 40% discount book with massive potential to increase book value at a faster pace than Berkshire. I have said it before and I am saying it again: Book value per share growth will primarily come from capital management rather than operating performance. But the market does not believe in it.
I was just wondering if Warren Buffet would have any interest in pursuing an interest in AIG. According to his recent remarks about his Bank of America (BAC) investment, he was quite impressed with the solutions that Brian Moynihan suggested to get the bank out of trouble and lay out a plan to put it on the growth path again. I wonder if he would have equally liked a substantial investment in AIG.