With the heightened focus on terrorism, Validus Holdings should be a beneficiary, since it is a leader in the writing of terrorism coverage in the London market. This is a specialty line that requires significant expertise. Give the renewed interest in this exposure, there is likely to be increased demand for this line of business. i expect Validus to benefit from increased writings of this typically highly profitable coverage. Moreover, I remain bullish on the company's common shares.
I'm quite bullish on Validus Holdings for many of the same reasons I was a large holder of PartnerRe shares. IMO, the company has strong management, an established franchise which can generate industry leading ROEs, and a very conservative balance sheet with significant redundancy in its loss reserves. Moreover, the underwriter has much excess capital such that it can return ALL it's operating earnings as dividends or stock repurchases. Last, but certainly not least, I view Validus as a strong takeover candidate in a rapidly consolidating industry. In addition, unlike the PartnerRe BOD, Validus's directors will negotiate to maximize value for its shareholders. I expect the share price to more than double over the next five years, and perhaps much sooner than that.
I'm beginning to think ALL the BAD news is embedded in this stock price with the shares selling at two-thirds of GAAP book value. With significant capital being returned to shareholders, Ichan and Paulson on the board, and little support among the analyst community, it seems as though any positive developments should lift this equity. There is now enormous pressure on management to show progress and a board that will show little forgiveness for any mistakes. It appears that this is the ultimate large cap value stock. IMO, it isn't even impossible that the board would entertain inquires from interested buyers for part or all of the company.
I expressed skepticism at the outset for a plan that eliminated 25% of AIG's senior managers. I've been involved closely with this industry for more than 35 years and have never observed such a wholesale elimination of institutional knowledge. I believe the likely future scenario for the company is that it is sold off in pieces with ultimately the p-c business being purchased by the likes of the "new" Chubb or Travelers. Hard to know how such developments play out for shareholder returns, but I certainly don't expect a move to anywhere close to book value over the next several years.
AIG management has committed to reducing the commercial lines' loss ratio by 600 bp over the next two years. Notwithstanding the $3.6 billion loss reserve strengthening the company took in 4Q15, I believe this goal will be very challenging to achieve in an increasingly competitive rate environment and slow growth worldwide economy. IMO, one of the over-riding problems the company has with its book of commercial business is it over-reliance on Fortune 1000 accounts. The fact of the matter is that large account policies simply aren't as profitable as middle-market business. AIG's focus on the biggest companies reflects its historic reliance and catering to the major insurance brokerage firms, i.e., Marsh, Aon and Willis, and the lesser amount of business it writes with regional and smaller independent agents. A change of focus to the middle market will require a significant reorientation in the firm's distribution and compensation strategy and philosophy. Even if management wanted to make such a change, it isn't something that could be accomplished in a year or two. In the meantime, I suspect that AIG will continue to muddle along until something dramatic occurs, e.g., a large insurer takes a run at them.
Why is AIG stock getting crushed today? Is it something particular to AIG, or more general in nature? I saw the William Blair analyst lowered his opinion, but I find it hard to believe this is the major reason.
AIG cut rates and told clients not to worry because as a ward of the US Government it could not fail.
What I'm not hearing from my sources is that AIG's US commercial p-c business is a mess. People are shell shocked from all the layoffs and with the reorganization nobody knows how to get anything done. Who knows when management will sort this out.
The fallout from the rating agencies to management's plan, including the reserve strengthening, was not good. Did Peter et al. speak to these entities before taking these actions? None of these developments inspires great confidence.