How AIG Could Regain Insurance Greatness

David Merkel Aleph Blog May 26, 2011

It seems that I can’t escape AIG anymore. I asked my kids (who are still at home) today, “Of all the jobs I had, where did I get treated the worst?” The oldest answered “AIG.” He was born shortly after I left AIG in 1992.

I guess I made some of the wounds obvious enough. I don’t believe in “payback,” I believe in “Love your enemies,” and “Be honest.” Thus I find it odd that I am being ever more sought out by reporters on any AIG news.

Granted, I’ve written on underreserving by AIG, the problems they had at their operating insurance subsidiaries during the financial crisis, which got picked up by SIGTARP.

What has prompted recent inquiries, is the sale of stock at $29/share, at only a 1.6% discount to the prior closing price. That price was a hodgepodge between what the market would bear, and what would give the government a “profit.” Bad idea in my opinion; it would have been better to price the deal lower, say $28.50, where the government took a loss, but where the market might have driven the price up. A 1.6% gap is marginal and would invite sellers. $28.50 would be over 3% and would invite buyers.

Now, some sympathy for Bruce Berkowitz — He saw book value decline by almost $1 today, from $47.32 to $46.35. I don’t know if he was buying as the largest private shareholder of AIG, but he was certainly disappointed by the company offering shares. Why offer shares at less than 2/3rds of book?

Easy, because AIG can’t borrow or issue any other security. But that is a signal to what the company is worth. I mean at worst, AIG could have procured a secured loan to provide $3 billion, offering a valuable subsidiary as collateral. They chose to dilute, which tells you what the stock is likely worth.

Also, with such a large fall in price after the offering the next offering should come at a larger discount to the recent market price. Those that were burned in this offering will be less willing to step up and take immediate losses.

Now, AIG has two other ways to improve their stock price. Improve transparency, and improve Return on Equity. The first of those means eliminate the sense that there could be negative surprises in the future. That means that reserves have to be modestly conservative, unlike they have been in the past. That means taking one last reserve strengthening to do so, if needed, even if it temporarily hurts the stock price because of the loss.

But if it can be shown that the loss is likely the last of such losses, and that AIG isn’t going to use its reserves to manipulate earnings any more, the loss in the stock price should be minimal. After all, a lot of that is buried in the discount to book anyway.

Then comes improving ROE. The CFO Peter Hancock has said, ‘"We are moving away from any kind of top-line targeting," Hancock said in a call with analysts. "We think that leads you to do business at the margin, which is unattractive."’

That’s some of the best news I have heard on AIG in some time. If AIG limits its underwriting, and focuses on profitability, it has a lot of potential for upside, but that would mean:

AIG would do best if it were a pure play P&C insurer. As I have argued since long before the crisis, the size and complexity of AIG make it unmanageable. Better management will come through creating a more focused company that does not require having a “superman” like Maurice Greenberg to manage it.

Disclosure: I don’t own any AIG, nor am I short. The same for my clients.

#upm_bookmarks_box {clear:both;display:block;} #upm_bookmarks_box_16 div {min-width:100px; white-space:nowrap; float:left;} #upm_bookmarks_box_16 a {text-decoration:none;} #upm_bookmarks_box_16 img {padding:0px;} #upm_bookmarks_box_24 div {min-width:110px; white-space:nowrap; float:left;} #upm_bookmarks_box_24 a {text-decoration:none;} #upm_bookmarks_box_24 img {padding:0px;} #upm_bookmarks_box_32 div {min-width:120px; white-space:nowrap; float:left;} #upm_bookmarks_box_32 a {text-decoration:none;} #upm_bookmarks_box_32 img {padding:0px;} #upm_bookmarks_box_48 div {min-width:130px; white-space:nowrap; float:left;} #upm_bookmarks_box_48 a {text-decoration:none;} #upm_bookmarks_box_48 img {padding:0px;} #upm_bookmarks_box_60 div {min-width:140px; white-space:nowrap; float:left;} #upm_bookmarks_box_60 a {text-decoration:none;} #upm_bookmarks_box_60 img {padding:0px;} Accounting, Insurance, Stocks | RSS 2.0 | Respond | Trackback |

[...] David on how to fix AIG. (AlephBlog) [...]

[...] How to fix AIG (AIG). (Aleph Blog) [...]

You must be logged in to post a comment.

blog advertising is good for you Disclaimer David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures. Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business though it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions. Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of. Aleph Blog FeedHow AIG Could Achieve Insurance GreatnessPost 1500, Post LaunchBook Review: DebunkeryImpossible Dream Project, Part 1Segmenting to Make Better DecisionsOn Harold Camping and the End of the WorldOn Longevity DerivativesLearning LeadershipAAII Baltimore MeetingImpossible Dream, Part 2Pages About Me & The Blog Brokerage Statements Categorized Book Reviews Accounting Asset Allocation Business Crisis Economics History Investing Macro Investing Miscellaneous Pension Personal Finance Quantitative Investing Risk Control Software Technical Analysis Wealth Contact Me Major Article List My Portfolios Posting Rules (please read prior to posting) Presentations The Eight Rules of my Investing Categories Academic Finance (71) Accounting (96) Asset Allocation (132) Banks (49) Best Articles (36) Blog News (96) Bonds (664) Book reviews (128) Christianity (16) Currencies (134) Ethics (101) Fed Policy (315) General (91) Home Schooling (14) Industry Rotation (114) Insurance (303) Macroeconomics (762) Pensions (92) Personal Finance (180) Portfolio Management (553) public policy (269) Quantitative Methods (236) Real Estate and Mortgages (313) Speculation (253) Stocks (669) Structured Products and Derivatives (318) The Rules (6) Value Investing (375) Monthly Archives May 2011 (18) April 2011 (25) March 2011 (25) February 2011 (14) January 2011 (19) December 2010 (33) November 2010 (19) October 2010 (26) September 2010 (26) August 2010 (22) July 2010 (23) June 2010 (16) May 2010 (20) April 2010 (20) March 2010 (27) February 2010 (19) January 2010 (24) December 2009 (25) November 2009 (21) October 2009 (21) September 2009 (26) August 2009 (18) July 2009 (24) June 2009 (22) May 2009 (29) April 2009 (30) March 2009 (24) February 2009 (24) January 2009 (41) December 2008 (37) November 2008 (37) October 2008 (36) September 2008 (40) August 2008 (40) July 2008 (28) June 2008 (36) May 2008 (43) April 2008 (44) March 2008 (47) February 2008 (39) January 2008 (46) December 2007 (36) November 2007 (29) October 2007 (29) September 2007 (39) August 2007 (50) July 2007 (35) June 2007 (25) May 2007 (27) April 2007 (28) March 2007 (34) February 2007 (19) Calendar May 2011 S M T W T F S « Apr 1234567 891011121314 15161718192021 22232425262728 293031 Blogroll Abnormal Returns Alea Bronte Capital CFO Magazine China financial markets Crossing Wall Street CXO Advisory Distressed Debt Investing Falkenblog Macroeconomic Resilience The AAO Weblog The Accounting Onion The Cody Blog The Ideas Report For Serious Investors the research puzzle WSJ China Realtime Report WSJ Deal Journal WSJ Developments Blog WSJ Marketbeat Blog WSJ Real Time Economics Blog WSJ The Source (London Blog) Other Links Global Finance School The Best Rates Personal Links Reformed Presbyterian Church of North America The Tav Blog Trinity Reformed Presbyterian Church Meta Register Log in Entries RSS Comments RSS WordPress.org Recent Comments stefan: I really enjoy your blog. It’s informative, thought-provoking and inspiring (with adequate reminders of... David Merkel: I’m not going to test that, because I was only going to make one pass over the data. I could have... David Merkel: Yes, that’s a liability of the method. Against that, it fits my a priori view of cycles, and the... joubert: Thank you. A dim light came on, even though I already knew what qunitles are. What’s becoming clearer... itamarst: One more question: other than the momentum=3/valuation=1 square, this is a purely momentum driven strategy.... Recent Trackbacks Abnormal Returns: Thursday links: skyscraper sentiment The Reformed Broker: Hot Links: Copper Shenanigans The Big Picture: Monday Morning Reads The Reformed Broker: Hot Links: In a Box Abnormal Returns: Sunday links: the defensive block

Subscribe in a reader

Subscribe in a reader (comments)

Enter your Email Preview | Powered by FeedBlitz

The Aleph Blog

Top markets blogs

Blog Catalog Blog Directory WallStreetBlips Finance Blog Rankings wallstreetblips_blog_ranking_13(1); new TWTR.Widget({ version: 2, type: 'profile', rpp: 4, interval: 6000, width: 'auto', height: 300, theme: { shell: { background: '#333333', color: '#ffffff' }, tweets: { background: '#000000', color: '#ffffff', links: '#4aed05' } }, features: { scrollbar: true, loop: false, live: true, hashtags: true, timestamp: true, avatars: false, behavior: 'all' } }).render().setUser('AlephBlog').start(); OnToplist is optimized by SEOAdd blog to our blog directory.

Copyright David Merkel (c) 2007-2011 Disclaimer: David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures. Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business though it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions. Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of. _qacct="p-37GEOW7Y76-VY";quantserve(); var sc_project=2500170; var sc_invisible=0; var sc_partition=23; var sc_security="aacd9be3"; View My Stats _uacct = "UA-1957608-1"; urchinTracker();

About Me & The Blog Brokerage Statements Categorized Book Reviews Accounting Asset Allocation Business Crisis Economics History Investing Macro Investing Miscellaneous Pension Personal Finance Quantitative Investing Risk Control Software Technical Analysis Wealth Contact Me Major Article List My Portfolios Posting Rules (please read prior to posting) Presentations The Eight Rules of my Investing st_go({blog:'2327063',v:'ext',post:'3814'}); var load_cmc = function(){linktracker_init(2327063,3814,2);}; if ( typeof addLoadEvent != 'undefined' ) addLoadEvent(load_cmc); else load_cmc();

How AIG Could Regain Insurance Greatness

Related Articles