Tuesday, February 24, 2009

Wrong again - on AIG

This blog aims to admit its mistakes.  This is an admission that this post was spectacularly wrong.

The main reason why the that post was wrong was that I assigned a very large value to AIG's life insurance businesses - and in the meantime pretty well every life insurance company in the world has imploded.  (See Hartford for a good example.) 

With the written down value of life insurance companies (and AIG is fundamentally a life insurance conglomerate) there is no hope that core bits of AIG can be sold in any reasonable time frame.  Hartford might come back as Peter Eavis posited in the WSJ - but I am not holding my breath.  Likewise there is some hope that the life insurance bits of AIG can find a bid one day.  But not today.

AIG was about 50% life insurance, 40% property and casualty and 10% the rest which included some very bad bits (mortgage insurance in the US) and some truly unbelieveably bad bits (AIG Financial Products).  

Even if it had not been for AIG Financial Products a company as dependent on life insurance as AIG would be in deep trouble now.  It would - for instance - almost certainly be trying to raise capital in the same manner as Manulife.  



J

14 comments:

IF said...

Maybe time for some introspection. Could it be that you are too far away from the US economy to analyze it reliably? Not saying, that Americans get it right, just that you have an additional handicap?

BeyondTheMargin.net said...

AIG is a ward of the state... They will continue to receive support, in all likelihood, no matter how much they might have lost in Q4. It still remains a better strategy for an orderly unwind. The government will likely convert their PFD into common equity to lessen the burden of the high dividend rate.

http://www.beyondthemargin.net/2009/01/politicizing-tarp.html

John Hempton said...

The mistake here was amateur hour. It was not to realise the nature of the life insurance problem.

My maths were that the life cos were worth maybe 150 billion. The cash drain on the parent from AIG FP might be that high - or it might not. But I thought they had a reasonable chance over a few years of selling the lifecos.

The lifecos in question were Asian (my time zone) as much as yours - so my location is nothing to do with the mistake.

The only problem is that the Lifecos are worth maybe 40 billion in this market - and the government is up the creek without a paddle.

Amateur hour mistake from me.

J

John Hempton said...

It was of course also a mistake made by many. At the time of the AIG bailout Hartford had not collapsed and the weakness in life insurance was not that apparent.

Reg - of the boom bust blog - was on top of it.

Smart guy.

Incidentally he was a long way from the Asian businesses - and he was still on top of it.

Anonymous said...

But this begs the question if the collapse in life insurer stock is a temporary thng mainly induced by fear or something more permanent induced by reasonable expectations of much diminished performance in the future.

If the former then the US government will be fine with AIG although it will take more time then some may have anticipated for AIG to sell it's assets, but the government will get it's money back. If the latter then the government really could be in trouble, although this would still depend on the eventual cashflow performance of the securities that AIG is now having to collateralize for such ridiculous amounts. If the eventual losses are not nearly as big as implied by the marks to market, per the banks, then AIG will eventually get it's collateral back and be able to repay the government.

lewy14 said...

John, did you see the "two cows" version of the AIG FP meltdown? (cf. the two cows explanation of different economic systems).

I'm drafting a "two cows" version of your "big post" on bank solvency.

John Hempton said...

There is likely more to come on this blog about AIG.

But I think at least part of the problem in life insurance is permanent.

That is the life insurance companies are not going back where they were - anywhere.

Still Hartford - and AIG Life - could bounce.

But the chance of recouping 150 billion from the sale of the lifecos - that seems gone to me.

J

babar ganesh said...

amateur question -- is the problem with life insurance cos that long term safe interest rates are low for the indefinite future (and perhaps negative in a real sense) vs long term annuity structures with fixed minimum interest rates? or is it something else?

IF said...

I was mostly motivated about my remark because of your insistence that housing related losses in California can bounded. Maybe my mind is just to bleak. For me what happened here is crazy. But then again from an Australian perspective it might look more normal. In a few years we are all smarter.

Now, do you keep following
http://www.bloomberg.com/apps/news?pid=20601100&sid=asBujeIkqO4U&refer=germany

John Hempton said...

Mr Ganesh - send me an email... I will answer your question...

J

Richard Smith said...

John, not to pile on, but is your guess of future earnings potential of US banks likely to be optimistic, in the same way as your first shot at life insurer earnings and valuations? I am not sure how you got the number - perhaps there is a prudent discount for a permanently smaller banking sector in there? If not, there might be some consequences for your 'insolvent but can eventually earn their way out' type of insolvent banks.

CouldMarxBeRight said...

Everyone sees their own explanation for stock market movements. I would posit that the reason for life insurers such as HIG or PRU to have plummeted is their VA (variable annuities) exposure in which they have sold massive amount of put options on stock markets (US and Japan). Do you have a different view? Not that it matters, but wondering if you know whether AIG has that kind of VA exposure?

John Hempton said...

Variable annuities are about half the story with the collapse of life insurance.

Most the rest is their asset books (property, corporate loans etc)

--------

As for bank profits -

1). Interest rates are down.

2). Interest rates being charged to customers are up.

Therefore - provided that the bank can fund itself at a reasonable spread - bank profits should be up on a pre-tax-pre-provision basis.

I have read a few banks whose 4th quarter revenue was a shoot-the-lights out record.

Now a lot of banks - indeed most US banks - fail the proviso - which is that they have a hard time funding themselves...

Now if you are Corus bank - and your revenue is down so hard because people dont pay the interest owed - and your funding is obtained by being top of the league tables at bankrate.com then - no you are stuffed.

J

John Hempton said...

oh, when I say the lifecos were worth X - I mean all the lifecos.

The asian ones are the jewel - but there are others.

J

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The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author.  In particular this blog is not directed for investment purposes at US Persons.