American International Group Inc (AIG) CEO Fired for Doing His Job

Editor’s Note: This article has been amended to reflect AIG’s official reserve charge figures.

When a CEO is made to walk the plank under the orders of a big investor, middle-aged men get as giddy as schoolgirls dishing on a Hollywood starlet’s failing marriage. The resignation of American International Group Inc (NYSE:AIG) CEO Peter Hancock, for instance, was cheered in a tweet by investor Carl Icahn, and AIG stock was up almost 2% in Thursday’s trade.

American International Group Inc (AIG) CEO Fired for Doing His Job

Hancock’s crime? He let insurance do what it’s supposed to. He booked a $5.6 billion charge against earnings last month, resulting in a $3 billion loss for the company’s fourth quarter, because the companies it insured against property and casualty claims suffered losses.

That’s the way insurance is supposed to work. You bet that people won’t suffer the catastrophes their actions could cause, but when those catastrophes happen, you lose your money. Of course, when things work out that way, Wall Street punishes you.

Life is as unfair in New York as in Hollywood.

Hancock’s Crimes

Hancock’s actions were conservative in the best sense. He had previously paid Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) $10.2 billion to take 80% of AIG’s reserve risk against its U.S. commercial insurance exposure before 2016.

Of that $5.6 billion, the bulk occurred from 2011 through 2015 ($3 billion), with $1.284 billion attributed to 2015 alone. Assuming loss ratios return to normal, the industry should be on course to raise rates, and book fat profits, starting later this year.

Hancock called his decision “a dramatic move to reduce uncertainty,” predicting better times ahead. But Icahn doesn’t want reduced uncertainty. What he wants is a breakup of the company so it will no longer be “systemically important,” allowing it to reduce its capital cushion and allowing him to book a fast profit.

Icahn also wanted Hancock’s head on a platter, and this is being delivered to him, as soon as the board can install a replacement. Hancock had been named CEO in 2014 to replace the late Robert Benmosche, after running AIG’s property insurance unit for four years.

Maybe AIG’s property insurance pricing was low under Hancock, but in a competitive market you take the price you need to get the business, not the price you want. When investment returns are great (as they have been for years now), a lot of players will take low prices, expecting investment returns to make up for any losses.

There is one area where Hancock was charged rightfully.

The company’s tech platform is a mess, and Hancock took the resignation of CIO Philip Fasano over it early this month. Technology is very complicated, and AIG has generally been late to the technology disruption party.

As a result of its IT problems, the physical breakup of AIG will be harder than Icahn thinks.

Icahn Bad for the Economy

Icahn’s thinking is great for Icahn, but bad for the economy.

Breaking up AIG means it can hold less capital against losses, but it makes all the pieces more vulnerable to those losses. Instead of the one big collapse suffered by AIG’s dumb bet on mortgage insurance in the last decade, you could have a bunch of smaller collapses caused by rising risks to all insurers from the Trump administration’s denial of global warming and its pending military buildup.

Of course, Icahn is as giddy as those schoolgirls over President Donald Trump.

Our Tyler Craig recently called AIG “atrocious,” suggesting an option trade to capture a downturn, but the Hancock resignation reversed the trend. The next leader of AIG is now widely assumed to be targeting a breakup of the company, so Icahn will get his profit.

It’s just this kind of short-term thinking on Wall Street that has led the U.S. economy to repeated recessions since computing and bar codes made inventory recessions disappear in the early 1980s. We’re headed down that road again. Icahn will lead us there.

Meanwhile, however, buy AIG stock and take some of Icahn’s profit.

Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/american-international-group-inc-aig-stock-ceo-peter-hancock/.

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