Fairholme buying AIG stock, converts & debt

[Packer16]

When a good underwriter like Berkley says that a competitor is underpricing premiums compared to what they would do to get an underwriting profit, I have a tendency to believe the disciplined underwriter versus the government-back entity.  These markets are not rocket science to underwrite, the uncertainties are well known and if everyone who is good underwriter is letting cheap business go and AIG is not, then I think AIG is the patsy.  In addition, if you look at the reserve triangle for the 2009 year alone, AIG underreserved by over $2 billion and rest of the history looks equally as bad.  So unless AIG has turned on a dime, the problems may still be there.   

 

Also, using FCF for a measure of strength is dangerous as every thing is dependent upon the underwriting assumptions.  If the going forward assumptions are the same as in the past the $2.2 billion can disappear pretty quick.  In addition, revenue has declined with a 122% combined ratio and questionable reserving would lead me to believe there is more trouble than opportunity here.

 

I was also surprised in looking at management in the proxy statement.  Not one P&C person on the board and alot of ex-folks who got burned in the financial crisis and folks from totally unrelated businesses (airlines, auto parts, IT services, retail, aerospace, media (?)).  How do these folks know how to lead a complex insurance company?  What am I missing???

 

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[prevalou]

1) if AIG revenue declines, maybe it is a sign they don't underprice anymore. Anyway competitors have an incentive to criticize the fragile incumbent to get back some business. It is clever but i am not required to believe it.

2) I am not sure Golub and Benmosche fit the definition of ineffective public servants (see their track records and background)

3) both of them have little background in pc insurance but a lot in life insurance and retirement.

4) It seems overly pessimistic to tell AIG earning power is at best 2 B$ when before the crisis the ROA on life insurance was 2% and better on PC insurance (about 500 b$ insurance assets now).

 

[omagh]

http://ir.wrberkley.com/events.cfm

At the UBS Conference (11 May 2010), Berkley gave his opinion that the industry is writing at a CR of 110, but fudging with reserve releases.  His comments were around slide 8 in the presentation deck.  IIRC, he mentioned AIG in comments to an earlier slide.  Berkley has been cutting their business due to soft pricing.

 

-O

Recent comments from Bill Berkley about AIG's reserving are worrisome:

 

Chairman Berkley said at the media lunch that AIG is charging commercial customers "prices that are clearly uneconomic" as it works to retain clients.

 

"AIG continues to be one of the most aggressive participants in the marketplace," he said, while saying the company is "a little less aggressive" than it was a year ago. Still, he said, the company is no longer setting aside enough money to pay claims on the policies it's selling.

 

"AIG has reserving issues, in my opinion," Berkley said. "AIG's reserves are, at best, optimistic," he said, while allowing that he didn't have as much information about the bailed-out insurer's business as AIG does. "No one knows AIG's reserves as well as AIG does."

 

Berkley's comments seem to echo those of others, including CEO Ted Kelly of Liberty Mutual and Chubb Corp. (CB) CEO John Finnegan, who said AIG has been cutting prices to keep customers. AIG has vigorously denied the charge, and a study by the Government Accountability Office found no evidence after an earlier round of accusations from rivals a year ago.

 

http://english.capital.gr/news.asp?id=977783

[twacowfca]

How do you know it is discounting premiums?

Because a competitor said so or is there another source?

 

 

"Discounting premiums" can be in the eye of the beholder.  Markel, Berkley and others not for attribution say or strongly hint they are doing this.  AIG says an impartial investigation concludes they are not.  Lack of pricing discipline might be a more accurate term.  In any case,  what they are doing is good for cat reinsurers because they appear to be paying a nice premium for laying off some of their cat risk.

[Packer16]

I agree the competitors have an incentive to bad mouth AIG but given their backgrounds, I would have a tendency to beileve folks who have a long history in the industry of providing excellent return versus new guys who have an OK record in related businesses but not P&C.  MetLife has had average performance and Gulob has done good at American Express but insurance was a small part of his business.  I don't know how the rest of the 10 or so executives who have no insurance experience help AIG. 

 

In addition, I would adjust pre-2008 numbers for the increased losses in the reserve tri-angle to find out the real RoA.  The stated numbers are estimates and historically the estimates have been overly aggresive. 

 

I am not invested in AIG so I don't have a horse in this race but thought I would mention so red flags that would filter them out of my circle of competance.  They may do OK but I just can't see how they will overcome these issues other than hope and external events that I cannot predict.

 

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[prevalou]

1)  Golub managed IDS (financial plans) before becoming Amex CEO and his track was already impressive. At Amex, his track was 30% per year.2) Metlife record during Benmosche tenure was very good (16% annually since IPO versus negative for the S&P 500+ work before the IPO) 3) AIG is more than a PC company (70 B PC net float and about 400 B life/retirement). Underreserving was not in AIG culture even if years 2000, etc. were underreserved. That being said I recognize WRB track as outstanding!