AIG is set to announce a fourth quarter loss of some $60 billion. That’s a huge, immense, devastating number. And one that likely spells the end of what was once the largest commercial insurer.
Most of the attention has focused on the Asian business, auto lines, and other financial operations. Amidst all the speculation about breakup, sale, outright takeover by the Feds, or business termination there is one missing element – a recognition of the value of the core business – AIG’s domestic operations.
The domestic commercial insurance operations and underwriting companies (Commercial and American International Underwriters (AIU)) are in generally good shape. Reserves are solid, and share is excellent. While the company suffers from chronic under-investment in claims technology and a managed care strategy that could best be described as old-fashioned, there is a lot of value in the domestic business.
AIG is justifiably renowned for its underwriting skill; distribution is solid, and management is generally strong. It is the largest underwriter of workers comp, a line that has been quite profitable of late. AIG is also a large writer of property and general liability coverages. There’s a nice, big business here, one that will undoubtedly be very valuable when the dust settles. But right now, no one wants to buy anything remotely associated with AIG. Intracompany relationships at AIG are tangled, interwoven webs – difficult to understand much less separate out. Any acquirer will have to be very sure they have extricated what they want, and left the rest behind, before closing a deal.
And right now there’s just no interest in starting the process. Couple that risk aversion with the sense among many big carriers that it will be cheaper and less risky to just take over customers as they flee AIG, and oyu start to understand why a sale to another insurer is unlikely over the near term.
The Feds sure don’t want the business. That leaves one other way to capture value – an IPO. Sure, that’s a crazy idea – who would want to do an IPO these days? You’d have to be nuts, or desperate, to do an IPO. That’s exactly the position AIG management finds themselves in – desperate.
The problem with an IPO – in addition to the obvious – is there has to be something left to sell – and that something includes management and staff. AIG is due to pay bonuses in a couple weeks, and if it doesn’t, the exodus of talent will turn into a flood of Biblical proportions. That will strip AIG of the people it would need to make an IPO work. But, as anyone who’s been paying attention will tell you, big financial companies that are getting big taxpayer bailouts better not pay any staff any bonuses.
There may be a pony in here. If deserving employees get shares in the new business, that may help convince them to stick around and recover some of the equity they lost as AIG’s stock cratered.
Desperate times call for desperate measures. And the folks at 70 Pine Street are nothing if not desperate…
Feb
27
After reading your blog, I was hoping AIG would be announcing their plans to dissolve on Monday. However, I see our gov’t has made another bad decision to step in and give AIG another $30B of our hard-earned tax dollars. Am I missing something or is this truly as insane as it appears to be? I was hoping Obama would have stopped the insanity that Bush initiated with bailing out this money-sucking insurance carrier. The gov’t has given $150B of our hard-earned tax dollars to AIG already and enough is enough. It’s time to let them fail and let the more responsible insurance companies assume the business.
For once, I would like to see our tax dollars benefit a national healthcare program or any other worthwhile cause vs. benefiting a poorly run company whose arrogance and lack of attention to cost cutting finally caught up with them. No company deserves to fail as much as these folks do. I just pray when you report the next multi-billion dollar loss at the end of this quarter which you no doubt will, it will be followed by an indication that the gov’t will no longer give them any more of our monies.
As a small business owner, it sickens me to see this. We run our company responsibly and are completely debt free. Not once, did I ever think, that if I failed, the gov’t would bail me out. It’s the risk of owning a business and the reason it is run by people making fiscally sound decisions. Yet, we have been forced to watch the likes of AIG spend billions of dollars to out market us, throw their clients lavish parties, pay their employees far above market value, and give many of their executives unearned, multi-million dollar bonuses. Who could have ever predicted that our gov’t would have rewarded AIG’s irresponsible spending behavior by giving them OUR money when they wasted their own.
I only hope our politicians quickly remember that they represent the American people and this IS NOT how we want our money spent.