Today’s note is a little different. It’s essentially a direct letter to Evan Greenberg that I am sharing with the rest of you. You may have seen reporting that Chubb approached AIG about a takeover. As I’m sure you all know, Evan has deep personal ties to AIG as it’s the family legacy and there is a natural instinct to want to right the wrongs of the past.
Which is precisely why Chubb shouldn’t do it. To misquote Michael Corleone, “it’s not business. It’s strictly personal.”
Dear Evan,
Don’t do it. Maybe 15 years ago it would have made sense. Not today. It’s time to let go.
You’ve already won. You built a better AIG. You’ve taken all the good accounts you wanted from them and then some. What’s left is the stuff you didn’t want (or maybe you wanted, but not at the price they would write it at).
What is there to gain? I’ll tell you what. A giant headache. While AIG has made a lot of progress, it’s still bogged down with legacy deadweight that can’t be undone. The amount of management time that will be wasted administering the resolution of the sins of the past is not a good use of your team’s talent.
What do you hope to accomplish? Restoring AIG to its past glory? That’s not going to happen. The company doing business as AIG today is so dramatically different from the one you grew up in that you might say it’s “AIGINO”, as in “AIG in name only”.
There’s not even a 70 Pine to go back to. It’s been turned into condos!
If we’re being honest, the closest thing that exists to the AIG of old is the one where you work everyday. You should be very proud of that. Don’t let a desire to relive the past drag down what you’ve created.
And to state the obvious, no, this would not be a deal like Ace where you adopt the target’s name. If you bought AIG, the name would die, so there is no sentimental benefit to buying it.
If, conversely, your goal is to kill the name so you don’t have to be reminded what a sad imitation of its past glory it has become, I guess that’s a reason, but not a very good one. Don’t let them live rent free in your head.
Some have speculated this would be no more than an unemotional financial deal given the discrepancy in valuations between the two companies. But the reason for that discrepancy is the massive difference in ROEs.
Buying a low return company for a low valuation doesn’t, in and of itself, create value. There are two ways it is possible to create value but neither seem to apply here.
First, something about being part of Chubb could help AIG grow by getting better access to business. While there is some reason to believe this, the problem is, given the large overlap in distribution, AIG would likely get that business from…Chubb!
As noted, if Chubb wanted AIG’s in force, they could easily acquire it organically by matching AIG’s price. No buyer is saying they prefer AIG paper to Chubb’s at the same terms. If the thought is replacing AIG’s paper will let you raise the price, well, maybe in some cases, but in others the broker will move it away to someone who will match AIG’s rate.
The second possible rationale is massive cost cutting. OK, sure, that seems reasonable, until you consider how much cost cutting has been done at AIG already over the last 15 years in an attempt to meet investor expectations.
And even if you can assign most of the accounts to Chubb employees and not bring over even one underwriter from AIG, what about the legacy systems? Have fun trying to integrate their historical data with what your underwriters are used to having available!
But the bigger issue with the cost cutting thesis is a lot of the revenue would get cut too. If we’re being honest, the expected retention of AIG accounts should probably be similar to the assumptions for a renewal rights deal.
This isn’t one of those “we’ll keep 80% of the premium but only take on half the costs” deals. If you realistically keep only 1/3 of the premium and say 1/4 of the cost, is that really exciting enough to deal with all the disruption? No, thank you!
Also, don’t forget you’d be buying into legacy reserves that have historically developed poorly and you’d have to allocate a chunk of the purchase price to buying a new ADC for that so you can sleep better.
The only other rationale I have is if the goal is to remove a weaker competitor from the market which would improve pricing and thus, in theory, pay for itself. Perhaps, but let someone else buy them then! Let another competitor be distracted with the headaches of integration, selling off units that don’t fit, etc. while you still participate in the benefit from the rationalized market.
At the end of the day, Evan, this feels like a vanity deal. The goal is to conquer the “imposters” who call themselves AIG and return it to the Greenberg family. That’s a nice plot for a HBO series, but it’s bound to disappoint in the real world.
Acquiring AIG would be the antithesis of Ace-Chubb. Instead of adding crown jewels you didn’t have access to at Ace, you would be going down market on a fixer upper that several other remodelers abandoned in frustration. It adds no meaningful capabilities or interesting markets. It’s just a scale play with some unappealing side effects.
If you’re really looking for something to acquire that is far more digestible, has made more progress in its turnaround, has ex-Chubb people in charge who would understand your culture, and brings less complicated legacy businesses, there is another cheap three letter insurer you can target.
Call the Tisch family and see if they’re open to doing something with CNA.
Regards,
Ian