AIG and Berkshire: Analyst Sees Perfect Fit -- WSJ

By Nicole Friedman and Leslie Scism 

Warren Buffett is the key to fixing America's seemingly unfixable insurance giant. So say Keefe, Bruyette & Woods analysts, who argued in a note that Mr. Buffett's Berkshire Hathaway Inc. should buy American International Group Inc.

While the two massive companies do compete in some markets, Berkshire is a larger presence in reinsurance and personal auto insurance and AIG focuses on commercial insurance.

"We see a strong case for Berkshire Hathaway buying AIG," KBW's Meyer Shields, Christopher Campbell and Anthony To write. "AIG could be significantly more stable and more valuable under a Berkshire Hathaway ownership scenario than on its own."

AIG declined to comment, and Berkshire didn't respond to a request for comment.

AIG Chief Executive Peter Hancock announced his resignation Wednesday, and the company is seeking its seventh CEO since 2005. Mr. Hancock will stay until the board names a successor. Just a few years removed from an $185 billion government bailout, AIG is struggling to meet financial-performance targets set in January 2016 as activist investors called for a breakup of the company and other moves to bring its profit margins in line with peers.

Berkshire has already taken on responsibility for some of AIG's potential future costs through a reinsurance deal the two companies signed in January. At the time, Mr. Buffett praised AIG and Mr. Hancock. Mr. Buffett and Mr. Hancock had lunch in New York the day before the deal was announced.

"I had lunch with Peter yesterday, have known him a long time and particularly admire what Peter has accomplished at AIG," Mr. Buffett said in an email to the Journal on Jan. 20.

KBW suggests that AIG could be housed within Berkshire Hathaway Specialty Insurance, Berkshire's commercial insurance arm run by Peter Eastwood, who worked at AIG for more than 20 years.

"Morale should immediately improve, and that matters," the analysts write. AIG employees who fear layoffs are more likely to leave or make bad underwriting decisions, they say.

KBW estimates that combined, the two companies would hold about 8% of the U.S. commercial insurance market.

Berkshire held about $86 billion in cash at year-end and has said it won't let its cash reserves drop below $20 billion. AIG's market capitalization stands at around $62 billion. The biggest impediment to a deal could be that AIG is designated as "systemically important," which could put Berkshire under new regulatory scrutiny, KBW says.

(END) Dow Jones Newswires

March 13, 2017 02:47 ET (06:47 GMT)

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