You made a $1.5bn profit? Big deal.
That is the attitude many are taking towards American
International Group (AIG)following its first-quarter results.
The slowly-recovering, government-backed insurer reported net
income of $1.5bn for the first quarter of 2010, a reverse from
a net loss of $4.4bn in the first quarter of 2009. Despite the
improvement, analysts remain sceptical about AIG's
For example, Cliff Gallant, analyst at Keefe, Bruyette and
Woods, is unimpressed by the results, saying that the reported
income is meaningless unless the benefits trickle down to the
"They are not paying their series dividend and over the
quarter they increased the amount of debt they owe to the
federal government," he told Reactions. "From my point from
view the net income that they are reporting is not accruing to
the common shareholder so to me it is a somewhat irrelevant
Gallant caused AIG's share price to drop 6% on April 27
after he released a report saying there is little long-term
value in AIG's shares under its ownership structure and that
the shares are grossly overvalued.
Other analysts Reactions has spoken to point out that AIG
remains extremely thinly capitalised. This means the market is
very skittish and skeptical about AIG's long-term
Others are more bullish, however. In May, Fairholme Capital
Management increased its holding of AIG shares to 25.5m shares
from 15m shares as of the end of March 31.
But I am not so sure anybody truly understands the endgame
here. This is an extraordinarily bizarre situation that the
insurance market has not seen before.
Following fellow US insurer The Hartford ridding itself of
its debt to the government earlier this year, AIG is now the
only insurance firm still being propped up with government
funds. AIG is in an incredibly awkward position.
According to Gallant: "On the one hand you have a company
that wants to say they are making money and financially
stabilising but at the same time they are saying: 'We can't pay
the interest we owe you.' That's not the degree of income,
strength and stability that most people want to see from
Therein lies the problem.
AIG wants to have its government-bought cake and eat it too. It
has to adopt a bullish, hard-nosed business attitude of
fighting to keep its business and saying everything is fine
while also remaining propped up by the taxpayer. Its recent
sales of AIA and Alico will help a lot, but it may still take
another two or three years for the government to get out of the
insurance game and it is far from clear it can do this without
the taxpayer making a great loss.
The situation clearly irks its competitors, and
understandably so. Mike McGavick, CEO of XL, went public with
his grievances in March at the World Insurance Forum. He said
the problem of everybody else competing with a government-owned
entity is very real.
"I am quite astonished, and I suppose at some crass level,
very jealous of [AIG] being able to call the Treasury to refuel
reserves. I think this is fascinating idea and should be
offensive to all of us that compete," was one of his
McGavick was merely saying what a lot of AIG's rivals must
be thinking. He added that he found it offensive AIG could pick
and choose which assets to sell, especially given the common
accusation that AIG is slashing rates in a desperate bid to
hold onto business. McGavick predicted that consumers would
ultimately lose out because pricing will have to go up when the
situation corrects itself.
AIG's largest competitors have another reason to hate the
firm. Insurers are being caught up on the focus on financial
institutions that are deemed too big to fail and may end up
lumbered with onerous new regulations.
I cannot help feeling that it would have been fairer to
carve AIG up quickly and separate its insurance units from the
parent company that, as a result of absurdly stupid risk
taking, found itself with higher obligations than it could ever
hope to pay by itself.
Its former CEO Hank Greenberg now believes AIG should have
been allowed to go bankrupt. I am not sure I agree with that.
The actions taken by the government were tough decisions made
under incredible pressure. But it seems in trying to stabilise
AIG, the government may end up destabilizing the rest of the
It is a bit rich that AIG's insurance units get to fight
another day and remain in the fold of the parent company. They
would argue that the problems were not related to insurance.
That is fine, but what use is having a free market if firms do
not get punished for making stupid decisions that bring a firm
to its knees? By rights, all of AIG's insurance units should
have been split from the parent as soon as possible, whether by
sale or IPO. This was the plan, hence the rebranding of Chartis
in preparation of a clean break. That the plan got changed
should be a source of outrage for its competitors.
Michael Loney is editor of Reactions