Friday, April 17, 2009

Welcome to the 21st Century

An AIG business that did not lose (much) money

AIG has sold 21st Century to Zurich.  21st Century is not a bad personal lines insurance company.  I blogged about it here (arguing that the CEO of that unit deserved his bonus).  

Anyway 21st Century was always partly owned by AIG but they took it private in 2007 buying the 39 percent they did not own for 813 million.  That valued 21st Century at just shy of $2.1 billion.

They just sold it to Zurich for $1.9 billion.  Zurich also assumed unit debt.

Hell – they are down less than ten percent.  

It’s a record for AIG.  Much rejoicing was had by taxpayers everywhere.  $2 billion down – 178 billion to go.

Now it is time to watch Zurich.  21st Century – despite (or maybe because) of its AIG pedigree is a far better run institution than Zurich’s Farmers business.  If Zurich is halfway competent they will merge Farmers into the (much smaller) 21st Century and not the reverse.

However there is no sign they are going to do that.  Competence and insurance seldom go together.


Post script.  Zurich is saying that they purchased more than the old 21st century operation.  

This makes the pricing element of the post wrong.

The old 21st century operation was MUCH better than either Zurich or any prior AIG operation - so it should remain the bulk of the value.

The reserving of Zurich's personal lines business did not make any sense in the 1999 year and adjacent periods.  Nor did anyone esle.  

If you go back and look even Berkshire (GEICO) mis-estimated their profits in 1998 and 1999 and had huge true ups in 2000.  So did Progressive and Mercury General.  In both MCY and PGR the stocks got hammered into 2000.  So - from memory - did the old 21st century stock.

However the degree of mis-statement was MUCH MUCH higher at Farmers.  Farmers true results were 5 percentage points worse than 21st in those days.  Farmers caused big problems.  State farm was (operationally) worse than any but it had (much) more capital.

PPS.  Just to remind those without very long memories.  The old 21st century was a very fine auto insurer and an average household insurer.  (I do not believe that it is possible to create enough difference as a household insurer to be a fine business.  GEICO is a fine auto insurer and does not do household.  Ditto Progressive.)

The auto business once a fine competitor to Mercury (MCY) in California.  MCY however does not sell household insurance.

Both were from California.

With earthquakes.

What was then called 20th Century hurt themselves bad on the Northridge Quake.   From memory that is how AIG got its initial stake.  

On that initial stake AIG made good money.  Better money than on their own business.



狂猪 said...

Dear Mr. Hempton

The following is off topic.

Now that Goldman Sachs and JP Morgan have reported their earnings, can you analyze on their result. In particular, is the good results sustainable or is it just smoke and mirror?

Sustainable profitability of banks will help with the economic recovery. Unfortunately, I am trained in software engineering and not accounting. Therefore, I like to hear your expert opinion.

Crazy Hog

Anonymous said...

Interesting view. How should one go about measuring the quality of 21st Century vs. Farmers? What would you look at in therms of tangible evidence? Many thanks!

Anonymous said...

Think you are wrong here
1. Zurich have bought more than 21st C- there is the old AIG agency personal lines and AIG direct as well as 21st C. Think you are comparing apples to oranges when you compare 1.9 to 2.1
2. Don't know why you assume the AIG business is better than Farmers. Combined ratio of >100% for AIG v 90% for Farmers.
3. Lastly Farmers is a great business from a Zurich point of view because the Exchanges which Zurich don't own take on most of the underwriting risk and Zurich just takes a fee.

babar ganesh said...

anything to say about GE?

John Hempton said...

I could be wrong here... I do not know what - if anything - AIG merged into 21st Century.

21st handled the 2000 debacle MUCH MUCH better than Farmers. Go back and look.

The reserving of Farmers made no sense back then.


Anonymous said...

Off topic but related to an earlier post...

I was hoping you could clarify some of the trading gains from the i-banks. Why such amazing numbers and are they sustainable?

More specifically, WSJ mentioned some trading gains came from toxic asset sales to the Fed. Does that mean the Fed paid more then what the banks had written the assets down to?

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