Rummage-Sale Bargains?

Buffett, Greenberg May Find AIG Rummage-Sale Bargains
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By Andrew Frye | 18 September 2008

Sept. 18 (Bloomberg)— Billionaire Warren Buffett and Maurice "Hank" Greenberg may find bargains as the U.S. government opens up American International Group Inc., the biggest U.S. insurer, for a rummage sale. AIG will probably sell assets to raise cash and repay the $85 billion loan it secured Sept. 16 from the Federal Reserve to stay in business. The insurance units are solvent, regulators said, because New York-based AIG was barred from tapping reserves at the subsidiaries even as $18 billion of losses tied to home loans drained capital from the holding company. [[So, those old, fuddy-duddy laws, and 'clueless' regulators would seem to have done some good, eh!?!: normxxx]]

Buffett, chairman of Berkshire Hathaway Inc., and Greenberg, who ran AIG for almost 40 years until 2005, may bump elbows with Allianz SE Chief Executive Officer Michael Diekmann and Munich Re's Nikolaus von Bomhard. Both told reporters this week they would consider bids for parts of AIG. "There's going to be widespread international interest in some of the areas where AIG has accumulated a dominant presence," said Frank Betz a partner at Warren, New Jersey-based Carret Zane Capital Management, which holds Berkshire shares. Buffett is probably "lurking in the shadows," looking for a deal, Betz said.

Insurers are buying U.S. property and casualty companies at the fastest rate in 10 years, announcing 33 deals worth $13.5 billion since Dec. 31, after profits rose in 2006 and 2007 on sales outside the U.S. and lower-than-average losses from Atlantic hurricanes. Buffett and CEOs including Prudential Financial Inc.'s John Strangfeld have said they'll be ready to make purchases when the credit crunch pushes rivals to sell assets at distressed prices.

New CEO

The government tapped former Allstate Corp. chief Edward Liddy to oversee the divestitures. Liddy replaces AIG CEO Robert Willumstad who took over in June and saw the company collapse before he could present a reorganization strategy, which was set to be unveiled Sept. 25. Liddy arrived yesterday and hadn't yet presented a plan, said spokesman Nicholas Ashooh. AIG may sell assets including the biggest commercial insurance business in the U.S. and "the best Asian insurance franchise in life and general insurance of any Western company," said David Havens, a credit analyst at UBS AG.

Investors led by Greenberg said hours before the federal loan announcement they might want to buy the insurer's subsidiaries. Greenberg, who controlled 11 percent of AIG's shares before the takeover, the largest block, has the ability to assemble "huge pools of capital" and will likely seek to bid for assets, Betz said.

Allianz, Private Equity

Diekmann and J.C. Flowers & Co., the private equity firm, submitted a joint bid to invest in AIG in the days preceding its collapse, two people with knowledge of the talks said. AIG rejected that offer. Munich-based Allianz says it will consider AIG assets that come up for sale. Munich Re, the world's biggest reinsurer, may pursue AIG's insurance business in Eastern Europe or its industrial protection unit, von Bomhard told German newspaper Handelsblatt. His comments were confirmed by a company spokesman.

"There's a lot of capacity" for acquisitions, Ziad Tadmoury, head of FM Insurance Co.'s business in France, said in an interview. European carriers "have got buying power," given the strength of the euro, Tadmoury said. Allstate, the largest publicly traded U.S. home and auto insurer, may consider bidding for aigdirect.com to expand its sales of car coverage over the Internet, said Stifel Nicolaus & Co. analyst Meyer Shields. Chubb Corp., Ace Ltd. or Allianz's Fireman's Fund Insurance unit could be interested in acquiring the AIG unit that sells coverage to individuals through independent agents, Shields said.

Allstate, Prudential

Allstate CEO Thomas Wilson said of potential takeovers on Sept. 4, "If you can get something attractive, you ought to do it." Spokesman Rich Halberg declined to comment on AIG. Prudential, the second-biggest U.S. life insurer, is "best positioned to make acquisitions," Morgan Stanley analyst Nigel Dally said yesterday in a research note. Newark, New Jersey-based Prudential and No. 1 MetLife Inc. may compete with Canadian and European carriers for AIG's life insurance assets, Dally said.

Prudential's Strangfeld anticipated in June, "there could be a phase, potentially, if another shoe drops," in which competitors seek cash by selling businesses. "It's an opportunity for our industry to deploy capital," he said. Buffett's Berkshire, which had about $30 billion in cash as of June 30, makes about half of its revenue from insurance and reinsurance.

Annuities, Reinsurance

"We would love to have a great business in any industry that we would understand," Buffett said at a news conference last year. "We would understand insurance." Buffett's spokeswoman didn't return a call seeking comment yesterday. Insurers, which have seen profits slip on declines in the value of holdings amid the subprime collapse and credit crisis, are now facing fresh losses on investments in AIG and bankrupt investment bank Lehman Brothers Holdings Inc.

This week, MetLife disclosed $800 million invested in AIG and Lehman debt, equity and derivatives, while Prudential said third-quarter earnings would be reduced by similar holdings. Units that may be sold include AIG's U.S. variable-annuity business, and a 59 percent stake in reinsurer Transatlantic Holdings Inc., according to Citigroup analyst Joshua Shanker. The Transatlantic stake is worth about $2.2 billion, based on yesterday's share price.

Aircraft Leasing

AIG's aircraft-leasing unit International Lease Finance Corp. may be bought by investors led by the unit's founder, Steven Udvar-Hazy, the Wall Street Journal reported yesterday, citing unnamed people. ILFC, which Willumstad had ruled out selling, could fetch $7 billion to $14 billion, said Bank of America Corp. analyst Alain Karaoglan. Udvar-Hazy and ILFC Chief Operating Officer John Plueger declined to comment, a secretary for Plueger said.

AIG may find bidders for life insurance businesses outside the U.S., where competitors including Hartford Financial Services Group Inc., MetLife, Prudential and Canada's Manulife Financial Corp. have been seeking customers. "When properties come up for sale around the world, it's very competitive," MetLife Chief Financial Officer William Wheeler said Sept. 10.


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