The credit crunch and complexity of the insurance giant's businesses combine to slow dealmaking, leaving investors unimpressed
Ever since early October, when Chief Executive Edward Liddy announced American International Group (AIG) would be auctioning off a slew of businesses to pay back its now $60 billion loan from the New York Federal Reserve, the pressure has been mounting on the insurer to start ringing up deals. So far the company has raised more than $1.8 billion, including a $742 million deal for specialty insurer Hartford Steam Boiler on Monday, Dec. 22.
Yet investors seem unimpressed. The Hartford deal moved AIG's stock price up exactly a penny, to 1.61 a share. A year ago the shares were priced at 58. Many analysts didn't even put out a comment, citing the deal as too small to account for much in AIG's dismal math.
Three months into its supposed deal-a-thon, AIG is in many ways still just gearing up. Complexity of the AIG empire is partly to blame; many of its businesses are so intertwined that it is taking months to separate them. Some of them share information systems, staff, and assets; others insure one another. "I read the newspaper, too, and this issue that we haven't sold anything, how could we possible sell anything, it's a terrible time, blah, blah, blah," says Paula Rosput Reynolds, AIG's chief restructuring officer. "We won't simply roll over and take bad prices because it's a bad time."
Coming Out Ahead on Hartford
Perhaps. But the price AIG got for Hartford is well off the $1.2 billion it paid for the Connecticut specialty insurer back in 2000. AIG has received dividend income from Hartford of $741 million with little additional investment beyond the purchase price, according to one person familiar with the deal. So it is coming out ahead on the investment. Still, the price cut shows how weak the markets have become, even for a strong business.
Hartford's niche—insurance against equipment breakdown and other specialty insurance and reinsurance products—is one that Tony Kuczinski, CEO of Munich Re America, the Princeton (N.J.)-based subsidiary of the Munich-based acquirer, sees as an attractive addition to his portfolio of businesses. "No question we think it was a good time to be a buyer," says Kuczinski.
Munich Re's strong balance sheet meant it could put up the price in cash, helping seal the deal for an asset that initially, earlier this fall, had 50 interested parties in the hunt. With credit hard to come by, in the past six months 85% of all $1.4 trillion of worldwide mergers and acquisitions tracked by Thomson Reuters (TRI) were cash deals, up from 73% in the first half of the year. But the biggest assets AIG has left to sell are its life-insurance arms, particularly its giant international life business. And the investment portfolios of life insurers in general have been hit hard by the market turmoil of 2008.
Owner of Asia's Largest Insurer
Thus, it's hard to imagine any of the big life insurance firms being able to finance such an acquisition with cash on hand, as Munich Re has. "It's very difficult now to raise capital to make these huge deals," notes Andrew Colannino, an analyst covering AIG for AM Best. "The larger the asset, the smaller the number of potential buyers there are out there."
In fact, it's taken Reynolds and her team months to get some of AIG's biggest businesses ready to go on the block. On some of them, the AIG team has only begun to talk to the very largest potential buyers about their interest, what Reynolds calls "the preparatory stages."
She expresses confidence that the deals will soon fall into place. The company's Hong Kong-headquartered AIA business is the largest insurer in Asia. "Even this world, as topsy-turvy as it is, can't be a world where people don't covet this," says Reynolds.
Top Employees Are Leaving
Reynolds also feels the company has time to sell. Though Liddy has said he wants to pay back the loan next year, technically AIG has five years to pay it off, starting from September. The biggest pressure to sell quickly is the company's own people. Even though AIG has promised roughly $450 million in retention bonuses it has started to lose top talent, including last week's exit of the longtime head of reinsurance giant Lexington Insurance.
Balancing speed and price is tricky. Reynolds calls the price for Hartford Steam Boiler fair, noting that it's actually more than the book value of the company and at about the midpoint of a group of comparable companies' current values. But that doesn't mean AIG will enjoy similar pricing of units yet to hit the market. "This is such a small part of AIG, and a very strong organization that operated pretty independently," says AM Best's Colannino. "It's hard to transfer the valuation of this to another deal they may do."
And while it's a positive sign that AIG is beginning to dispatch businesses, it may still be a while before any of the largest operations on the block are following Hartford's lead.