Risk managers eye developments at AIG as Buffett mooted as saviour

AIG’s corporate policyholders and brokers were remarkably loyal to AIG as it struggled to survive the ravages of the credit crisis, bailout by the US taxpayer and subsequent efforts to get back on track. The question is will they remain so through the latest turbulence? The last time Commercial Risk Europe had the opportunity to interview Peter Hancock – AIG’s CEO who has just announced he is leaving the business – he told a convincing tale about how the leading international insurance group was safely out of intensive care and making good progress in rehab. The group was forging ahead with efforts to pay back the US tax payer, create a more streamlined and efficient management structure, deploy capital to the most profitable lines and invest in improved service and innovative products for customers, he said. Then, in late 2015, along came activist investors Carl Icahn and John Paulson, who demanded a “drastic strategic shift” from the group. They called for a breakup of the group to avoid being categorised as a Systemically Important Financial Institution (SIFI), and forced their way onto the board. AIG chairman Douglas Steenland and Mr Hancock fought an impressive rearguard action as they strove to convince shareholders that a breakup would not lead to lower cost of capital and therefore make sense for them. Having paid off the taxpayer, Mr Hancock instead led a two-year turnaround plan that kicked off in January 2016. It was designed to return $25bn to shareholders. Last year, AIG returned a total of $13.1bn of capital to shareholders. But Mr Hancock’s efforts were undermined by a continued need to post big reserve increases, primarily for US liability business. AIG’s fourth quarter included a $5.6bn hit from prior year adverse reserve development, much higher than analysts expected. This led to a net loss of $3bn in the fourth quarter of 2016 against a loss of $1.8bn in 2015. AIG’s full year result was a loss of $849m compared with a profit of $2.2bn in 2015. One suspected that something was amiss when AIG announced that it had agreed an adverse development reinsurance agreement, effective 1 January of this year, with National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway. The agreement covers 80% of all AIG’s US Commercial long-tail exposures for accident years 2015 and prior. The cost of this deal was $9.8bn, payable in full by 30 June 2017. Mr Hancock said at the time: “This decisive step enables us to focus firmly on the future and build on the progress we’ve made in transforming AIG. The agreement supports our stated strategy and gives us additional risk capacity to serve our clients and return capital to shareholders.” When AIG’s poor 2016 results were announced, the company also confirmed that up to 14 February it had repurchased an additional 18.4 million common shares for $1.2bn this year, on top of the $13.1bn paid back last year. The board also authorised an additional increase in its previous repurchase authorisation of AIG Common Stock of $3.5bn. This left an aggregate remaining authorisation of approximately $4.7bn. Mr Hancock presumably took a long deep breath and hoped that shareholders would be happy with a further payoff and decided that the recovery plan would work and the capital repayment plan would succeed. Clearly this was not the case and last week Mr Hancock’s resignation was announced with no successor yet found. It was reported that tensions between Mr Hancock and Mr Icahn began to mount again and Mr Icahn had threatened a proxy fight. The investor was clearly happy with the news that Mr Hancock would leave. "We fully support the actions taken today by the board of AIG," Mr Icahn tweeted last Thursday. So the big questions for policyholders and brokers now is who is going to take over from Mr Hancock, what is going to happen to AIG and ultimately should they remain as loyal this time as they did when Chartis was created following the financial crisis? One obvious option is that the board, still under Mr Steenland’s chairmanship, reconsiders Mr Icahn’s original proposal for a full breakup of the group. This would presumably either see the non-life insurance business continue as AIG as other elements of the group are sold off, or the repeat creation of a unit such as Chartis. Another option would be that the non-life business, or the whole group, would be sold to another insurance group. In reality there is only one potential buyer for a group of this size, and that is, of course, Berkshire Hathaway. Not surprisingly one analyst, Meyer Shields of Keefe Bruyette Woods (KBW), has issued a note this week suggesting that this would make sense. “In our view, AIG could be significantly more stable and more valuable under a Berkshire Hathaway ownership scenario than on its own, which could justify a decent premium to the current share price,” the analyst wrote. Berkshire Hathaway has seriously expanded into the primary corporate insurance space in recent times through the creation of Berkshire Hathaway Specialty Insurance (BHSI) in 2013, notably by a team from AIG led by Peter Eastwood. In his latest letter to shareholders, Mr Buffett said that BHSI increased its premium income by an impressive 40% last year, made a decent profit in the process and is “destined” to become one of the world’s leading P&C insurance groups. The KBW analyst argued that it would make sense for BHSI to take over AIG because it would massively improve morale among staff and shareholders, while likely persuading brokers and risk managers to stick with the group. He also argued that under Berkshire Hathaway’s reinsurance leader Ajit Jain, AIG’s decision-making on what business to write and what to avoid would be improved. And then there is around $338bn of assets, or float as Mr Buffett likes to call it, that Berkshire Hathaway could put to work and ease the pressure on the underwriting side at AIG. Mr Jain clearly feels relatively comfortable with AIG’s book of business otherwise he would not have authorised the adverse development cover back in January. But, and it's a big but, would Mr Buffett really want to take on AIG’s float lock, stock and barrel and the political complications that would come with it? Would Mr Eastwood not be better off accelerating BHSI’s already impressive growth path by simply poaching AIG’s best staff and business? Berkshire Hathaway could easily afford the acquisition, presumably with some debt thrown in. But Mr Buffett is not a fan of turnaround acquisitions and this would represent a big change in strategy for the group. One suspects that Commercial Risk Europe’s risk manager readers would, however, rather like Mr Buffett to make that U-turn.

Risk managers eye developments at AIG as Buffett mooted as saviour

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