It's Time to Break Up AIG

Recently at RealMoney, I wrote:

Buy Other Insurers off of the Bad AIG News
2/12/2008 2:54 AM EST

Sometimes I think there are too many investors trading baskets of stocks, and too few doing real investing work. I have rarely been bullish on AIG… I think the last time I owned it was slightly before they added it to the DJIA, and I sold it on the day it was added. Why bearish on AIG? Isn’t it cheap? It might be; who can tell? There’s a lot buried on AIG’s balance sheet. Who can truly tell whether AIG Financial Products has its values set right? International Lease Finance? American General Finance? The long-tail casualty reserves? The value of its mortgage insurer? I’m not saying anything is wrong here, but it is a complex company, and complexity always deserves a discount.

You can read my articles from 2-3 years ago where I went through this exercise when the accounting went bad the last time, and Greenberg was shown the door. (And, judging from the scuttlebutt I hear, it has been a good thing for him. But not for AIG.)

AIG deserves to be broken up into simpler component parts that can be more easily understood and valued. Perhaps Greenberg could manage the behemoth (though I have my doubts), no one man can. There are too many disparate moving parts.

So, what would I do off of the news? Buy other insurers that have gotten hit due to senseless collateral damage (no pun intended). As I recently wrote at my blog:

If Prudential drops much further, I am buying some. With an estimated 2009 PE below 8, it would be hard to go wrong on such a high quality company. I am also hoping that Assurant drops below $53, where I will buy more. The industry fundamentals are generally favorable. Honestly, I could get juiced about Stancorp below $50, Principal, Protective, Lincoln National, Delphi Financial, Metlife… There are quality companies going on sale, and my only limit is how much I am willing to overweight the industry. Going into the energy wave in 2002, I was quadruple-weight energy. Insurance stocks are 16% of my portfolio now, which is quadruple-weight or so. This is a defensive group, with reasonable upside. I’ll keep you apprised as I make moves here.

What can I say? I like the industry’s fundamentals. These companies do not have the balance sheet issues that AIG does. I will be a buyer of some of these names on weakness.

Look, back when AIG had a AAA rating, there was a reason to hold the whole thing together, because of cheap financing. Today, AIG suffers from a conglomerate discount, because no one can understand the balance sheet. (Can anyone inside AIG understand all the exposures that they face?)

Simpler is better. Simple companies get better valuations, and the managers are sharper at financial controls, because they don’t have to cover as much ground. They can focus. So it should be for AIG, if they want to unlock value. (Perhaps AIG is the Citigroup of the insurance industry…)

Full disclosure: Long LNC HIG AIZ

Comments

[mature adult:]

First loss in how many years and it's time to break up the company? Come on.

2008 Feb 29 06:17 AM

[User 158670:]

mature adult - you miss the point here. you need - literally - a magnifying glass to see all of the different business enterprises this company has created over the years. it is out right labyrinthian. one of the purposes of this structure was to maintain the all roads lead back to Hank concept. he literally was the ultimate authority over any capital decision. absent Greenberg, the company fell into disarray because Greenberg was AIG. the company never was the product of talent and seasoned management. ask anyone to what extent the company succeeds at grooming, training and empowering management? they deserve to be broken up. it's also a company that fails to pay which was Greenberg's philosophy, focused on reducing expense. the immediate casualty was that it is a disincentive to stay there. AIG was and is a stepping stone in one's career. I find it ironic that most of Greenberg's wealth now is tied to a company over which he exercises no control. my bet is that Starr will make a bid for pieces of the company and it will be broken up. AIG was good at making easy money but never groomed the real investing skills that will be required to compete in the current environment - and I do mean insurance as well as the investment management business.

2008 Feb 29 09:28 AM

[WAKEUP:]

"Can anyone inside AIG understand all the exposures that they face?" Somebody MAY be able to understand all the exposures they face, but, it's probably only a chosen few, and they seem to PREFER it that way. Some years ago, while I was a territory manager, at AIG, I tried to explore the full role of Starr Technical Risks Agency, Inc. ("Starr Tech," as the AIG insiders refer to it) in the overall hierarchy of AIG. I was told, RUDELY, by the regional Starr Tech manager that Starr Tech's role was known to Starr Tech management, and that Starr Tech's management was the ONLY group that NEEDED to know. Months later, an AIG Senior Vice President mentioned to me that he had been told of my curiousity about Starr Tech, and that it was "probably best not to go asking that kind of questions." The Starr Tech secrecy was not the only "unmentionable" area within AIG, but it's a good example of how difficult it is even for management level employees to find out what the company is really all about. Would AIG knowingly HIDE important information, from outsiders? WHAT DO YOU THINK?

2008 Feb 29 02:51 PM

[abcde_98:]

David, so you have been reading the Yahoo message boards. Why not cut & paste some of what I've written there regarding splitting up the company, enterprise risk management, etc.
On the Yahoo message board, it was an eye opener to read of another aspect of the mortgage industry -- the appraisals themselves and how companies like an AIG (and others), can play hard ball / bully the appraisors and their firms. As the mortgage industry is scrutinized further perhaps issues like this will become more apparent and the "bully" advantage will decline.

Years ago there was talk in the industry of some insurers making money by not paying claims (or significantly delaying). Some other companies made money through "float" (accepting money as an intermediary and then holding it for a little while before paying it over to the party it should go to). How much additional income is still generated by the insurance industry through such practices?

Where was the ERM? Derivatives? that are illiquid? There is always a winner and loser with derivatives. Sure, just keep taking one side of a derivative trade, oh and be sure not to protect against losses through purchase of a security at, say, a 10% loss level. Oh, we never thought about it? Oh, there is no one offering that type of derivative of the magnitude of our portfolio? Oh, PwC said we had a material weakness because we did not record the credit quality of the business underlying the derivatives - who needs to know that? Oh, forget Kevin Costner, we are the Untouchables.

The competitive advantages that this company once had have been and continue to erode, just like the US dollar.

2008 Mar 06 09:03 AM