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Should AIG be on Buffett’s shopping list?

Should AIG be on Buffett’s shopping list?

Berkshire Hathaway Inc. should buy American International Group Inc., analysts at Keefe, Bruyette & Woods Inc. said in a note Friday.

But if that doesn't happen, AIG should take a two-pronged approach to solving its leadership puzzle, lead KBW analyst Meyer Shields said.

While acknowledging that Berkshire Hathaway Chairman Warren Buffett “likes neither receiving stock tips nor turnaround stories,” the note says there’s a strong case for the conglomerate to take over AIG and merge it with its own commercial insurance unit, Berkshire Hathaway Specialty Insurance Co., which is run by former AIG executive Peter Eastwood.

The suggestion came one day after Peter Hancock resigned as CEO of AIG and less than a month after the insurer posted a $3.04 billion fourth-quarter loss.

The two companies already have a significant financial link, in that AIG bought $20 billion in retroactive reinsurance coverage from Berkshire Hathaway in January, but the KBW analysts said they think Mr. Buffett should take the relationship several steps further.

“In our view, AIG could be significantly more stable and more valuable under a Berkshire Hathaway ownership scenario than on its own,” the analysts said — although they noted that AIG’s status as a systemically important financial institution, or SIFI, could be an obstacle.

A sale to Berkshire Hathaway would improve morale at AIG, where headcount has been slashed in the past year, and end the risk of a “brain drain” as AIG staff look for more stable employers, the note said.

“We believe that Mr. Eastwood’s — and, of course, Mr. Buffett’s — leadership could assuage most of these concerns. By the same token, we think this could also alleviate insurance agents’ and brokers’ concerns about putting quality business with AIG,” the note said.

Berkshire Hathaway could also help AIG with its “underwriting triage,” where it is trying to keep good risks in its book of business and jettison bad risks, the analysts said.

And Mr. Buffett, who famously likes insurance businesses for the potential investment income they offer, would be able to access AIG’s $338 billion investment portfolio, they said.

But even if Berkshire Hathaway were interested in making a deal for AIG, the increased regulatory scrutiny that comes with AIG’s SIFI status could be a major obstacle, the analysts said.

“We don’t know whether the associated scrutiny and associated restrictions could abate if Berkshire Hathaway were to buy AIG. In fact, it’s possible that all of Berkshire could fall under AIG-level scrutiny, which — given Berkshire Hathaway’s well-known distaste for oversight — would almost certainly make the deal a non-starter, regardless of its financial merits,” the note said.

In an interview on Monday, Mr. Shields, who leads the insurance team at KBW, said that, given AIG's size, Berkshire Hathaway would likely be the only realistic possible buyer.

If a deal does not happen, AIG should consider taking a dual approach to filling its leadership vacancy by appointing a well-known industry figure as CEO to reassure employees, but have a second senior executive working to turnaround the company's operations, he said.

"You have to get somone at the top that employees trust," Mr. Meyer said.

A similar approach worked well at Marsh & McLennan Cos. Inc., he said, when Brian Duperreault -- who lead the expansion of Ace Ltd. into a global insurer -- came out of retirement to lead the firm in the aftermath of the Spitzer investigations, while Daniel Glaser, who now heads Marsh & McLennan, worked with Mr. Duperreault to turn around its operations.

Mr. Glaser is one of several industry figures who observers have speculated could be a candidate to take the top job at AIG.

Berkshire Hathaway did not immediately return a call seeking comment. An AIG spokesman declined to comment.









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