Stay Away from AIG - Barron's

Includes: AIG, MET
by: Rachael Granby

Shares of AIG (NYSE:AIG) have surged 53% in the last week, but Barron's Andrew Bary warns the stock's spectacular gains can't erase the fact that the company's likely to face continuing troubles.

The government has an 80% equity stake in the insurer and shares look overpriced. The current rally is likely a combination of a short squeeze, hope for a larger role for former CEO Hank Greenberg and optimism that a recovering market will help AIG's portfolio improve.

Given its complicated financials and limited communication from management, it's difficult for investors to evaluate the financial health of AIG. After backing out the government's $42B in preferred stock, AIG's common equity falls to $15B, or $21.80 per share. Stripping out $6.4B of goodwill assets and around $14B of a "prepaid commitment asset" connected to the government's backstop of AIG, Barron's calculates the company has negative tangible common shareholder equity.

Investors interested in AIG would do better to consider the company's debt, rather than its common stock. In particular, AIG has 8.25% bonds due in 2018 trading for around 80 cents on the dollar, for a yield of 11.84%. AIG also has junior subordinated debentures (NYSE:AVF) that yield 13% and are senior to the government's preferred shares, though they rank below senior debt.

In early July, Joshua Shanker, then with Citigroup, wrote there was a "70% chance that the equity at AIG is zero" and cut his price target to $14.


Some more points to ponder:

  • AIG shares took off largely due to comments by new CEO Robert Benmosche, who boldly promised to repay the government in full and still turn a profit for shareholders. However, the fact that AIG used $2.4B from recent asset sales to improve the capital position of its property-casualty unit rather than paying down some of the government debt raises questions about the insurer's ability to repay its bailout.
  • Benmosche previously served as MetLife's (NYSE:MET) chairman and CEO, and is still a MetLife shareholder. This could spell trouble for talks about a potential deal to sell AIG's Alico unit to MetLife.