Now here’s some blue sky thinking.
In a note circulated on Tuesday, Citi financial analyst Todd Bault and his team have this suggestion:
There is a real opportunity for a major tech firm like GOOGL and an investment bank to buy AIG and turn it into an insurance FinTech laboratory. There would be great benefits to all parties, investors, the insurance industry, and society itself by making insurance a better product.
Citi admits that the idea is “audacious, but that doesn’t mean it’s wrong.”
For those not up to speed, AIG is an American insurance Goliath perhaps best known for its central role in the 2008 financial crisis.
AIG pumped out huge amounts of credit default swaps — insurance against loan packages defaulting — and ended up needing a $180 billion (£125 billion) bailout from the government when the loans it had insured did indeed go belly-up. It reported the largest loss in corporate history: a record $61.7 billion (£42.9 billion) in the fourth quarter of 2008.
The share price graph from 2008 up to present day tells you everything you need to know about how things have been for AIG since then.
So why exactly does Citi think Google’s parent company Alphabet should buy this basket case? Put simply: “We believe a tech firm needs to control the technological development and strategy of a major insurer in order to move insurance forward.”
Insurance is crying out for innovation and many venture capitalists I’ve spoken to in the past believe it could be the next frontier of fintech (financial technology).
At the same time, insurance companies themselves are terrible at innovating — as Pascal Bouvier, at the time partner at fintech venture capital firm Route66 Ventures, put it to me last September: “Be in the City around lunchtime and stop the people walking around carrying big reams of paper — they’re insurance brokers.”
But, Citi says, tech companies can’t just build smart new insurance technology without the help of existing players. While companies like AIG are behind when it comes to technology, they have unrivalled expertise in a highly regulated, complex industry.
So the best combination, Citi thinks, is for a deep link up — Google should partner with a financial firm to buy AIG (Bault and his team admit that Google’s investors would never tolerate solo ownership.)
Such a deal would solve a problem for AIG — it’s facing pressure from activist investors to break up its business and Google could help it become more “modular,” in Citi’s words. This involves developing distinct tech-based products and services that can be assembled into larger packages like Lego bricks rather than the current spiders web business that is difficult to split up.
But what about Google? Where’s the upside for them?
Firstly, such a deal would give Google access to an unrivalled treasure trove of data on the insurance industry that Google could surely utilise. Given the AIG is trading at such a huge discount — 70% of book value, a $28 billion (£19.5 billion) shortfall — it’s a bargain that shouldn’t be sniffed at.
And secondly, if Google can crack the insurance innovation, it could reap huge rewards in a huge market. Citi writes:
We cannot understate how much could be gained by solving the insurance problem. Insurance is an exception throughout financial services: heavily bespoke, hard to automate, does not trade in liquid markets, and more. If you can make progress in insurance, you have likely made progress in other areas, like managing illiquid assets and other aspects of risk management. Simply developing the right data models for insurance would like have applications elsewhere.
And, appealing to Alphabet’s corporate conscience, Citi says that: “Making insurance more modular would likely better align users and investors and allow for more coverage. Insurance fits rather well under GOOGL’s aim to “do good.””
For more hard-nosed investors, Citi says: “This might not even be money losing for GOOGL if they arrange for fees as part of the deal.”
Bault and his team think only a company of Alphabet’s size could take on AIG, which is still worth a hefty $65.5 billion (£45.6 billion) despite its trading discount.
Citi sums up: “They have the size needed to pull this off. They have the reputation for cutting edge research and data science. They have an established commitment for “moonshot” projects.”
While all that may be true, Alphabet have shown absolutely no appetite for getting into Wall Street-style finance. What little interest it has shown in fintech has been in consumer-facing products like GMail payments and mobile wallets.
Still, stranger things have happened right?
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