AIG Overpriced? Perhaps Not as Much as Barron's Thinks

If you measured the worth of [[AIG]] by its stock price performance this year, you’d be at a real loss as to what conclusion to draw. And that seems exactly what investors are.

After plunging to nearly as low as it was at the bottom of the financial crisis in late June and early July, the beleaguered insurance behemoth audaciously announced a 20 for 1 reverse stock split. Then, in the final stages of this month, it leaped like a biotech.

The more than 500 percent price movement is still unjustified, according to Barron’s Andrew Bary, whose article Still No Port In This Storm single-handedly sent AIG’s shares tumbling 10 percent Monday. According to Barry:

AIG stock looks overpriced. The rally seems to reflect a short squeeze in the shares, hopes for a potentially larger role for former CEO Hank Greenberg, and optimism that the rally in the markets will bolster AIG’s enormous investment portfolio, credit-default swaps and other derivatives that nearly destroyed the company. AIG, however, faces big challenges as it weighs the sale of key overseas life-insurance businesses while reviving its core property-casualty insurance operations.

That final point is not without merit. Friday, it was rumored that buyers for AIG’s Taiwanese life insurance unit may not be willing to pay the $2 billion asking price. The three buyers on the hot list for Nan Shan Life Insurance are currently China Strategic Holding (CSGGF.PK), Cathay Financial Holding, and Chinatrust Financial Holding. All have their own ongoing problems at home.

Quietly, private equity firm Carlyle Group is also partnering with Taiwanese financial services giant Fubon Financial to make an offer which might well turn out to be the golden goose, however.

There are glimmers of hope in the form of other asset sales. China Life Insurance (LFC) is mulling an investment in the IPO of American International Assurance (AIA), the Asian life insurance division of AIG. Judging by the recent demand from China Construction Bank (CICHF.PK) for AIG Finance (Hong Kong), and stricter lending standards at home in China, a stake in a successful AIA market debut might make for a welcome relief to China Life’s balance sheet in the fourth quarter.

AIG’s aircraft-leasing business is being eyed by $40 billion competitor International Lease Finance ((ILFC)) for a potential $2 billion asset sale, too. Right now, that looks like a deal which ILFC wants more than AIG does.

With $185 billion in debt, AIG is certainly not in great shape right now. But its $35 billion stock market value doesn’t look like too much to pay when considering the longevity of the insurer, either. In an aggressive market environment, rapidly spurred by Asian investment (despite the volatility), it’s almost fair to say that the current market capitalization of AIG reflects the prices its various remaining today will rise to in twelve months time.

Bary advises investors to buy the 8¼ percent bonds due in 2018, since they trade around 80 cents on the dollar, for a yield of 11.84 percent. While that might be an attractive defensive investment, with government aid behind it, and only 134 million shares outstanding, AIG stock at around $45 a share will likely yield far more than double-digit percentage points in 9 years time.

With or without Hank Greenberg.

Comments

[Moon Kil Woong:]

I have heard rumors that AIG is undercutting competitors on rates and is will be expanding in the US. This follows suit with other too big to fail failures like Freddie Mac and Fannie Mae that are gobbling up marketshare. Government supported private institutions have unfair business advantages and always end up killing competition and injecting government money and politics into everything they touch (if not with corruption on top of that).

Really, the belief that this is occuring is one good example of the unfairness of it all. Being so bad you can't go bankrupt is a great selling point when you sell insurance. If you buy from a legitimate insurer you must take into account counter party risk. With AIG, no problem. They can't go bankrupt. So no risk there...

What a mess we are making of our industries.

Sep 01 05:16 AM

[pelican:]

"With $185 billion in debt, AIG is certainly not in great shape right now.
***Understatement of the summer?

"But its $35 billion stock market value doesn’t look like too much to pay when considering the longevity of the insurer, either."

***I'm sorry but what does this mean? Are you suggesting the AIG brand is what it once was? Are you saying AIG will be around for years to come? I'm not sure you can make this statement without backing it up with more financial analysis.

"In an aggressive market environment, rapidly spurred by Asian investment (despite the volatility), it’s almost fair to say that the current market capitalization of AIG reflects the prices its various remaining today will rise to in twelve months time."

***Almost fair to say? Again, based on what analysis? The company has not been getting good prices for its assets and saying they will over the next 12 months doesn't mean it will happen.

To be honest, I'm stunned that you haven't mentioned how the CEO recently stated the value of the assets now is less than what they owe the government. As noted in a Motley Fool article today, assets were reported = $58 billion (book value even though they've been getting less than book) and they owe $80 billion. So you don't just need some increase in assets values, you need a heckuva increase just to pay off the government. In the meantime, as the company sells assets, its earnings power decreases. So after the government is paid off - assuming for a moment they actually are paid in full - you've got the bondholders. Any crumbs left go to the shareholders, and I seriously doubt they will see anything. AIG is going through a forced liquidation which even the CEO admits will make it challenging to even end up with a company that is a former shell of itself. Nonetheless, you make it sound as if its a given that the stock will continue to rise, let alone the company even existing over the next decade.

There is something very wrong with this kind of article and I think its because it reminds me of others I've seen in recent years; the kind that touts companies on the brink (e.g. mortgage companies). In my view, there needs to be greater responsibility explaining the potential (and often enormous) risks.

Sep 01 05:22 AM

[frosty:]

Price is what you pay, value is what you get. Of course, value is in the eye of the beholder. All these potential deals for Asian operations - well it seems to me that the Chinese Communists are better capitalists than the managers of AIG so these deals will not be as good as they now seem. If you believe this article, you should buy as much AIG as you can get your hands on. Especially since the US government owns 84%, right? And they wouldn't do anything to harm the taxpayers' investment, would they?

Sorry to say, this company does not even come up to the standard of a gamble. It's in the ICU and the doctors are studying what organs might be harvested when death INEVITABLY occurs.

Sep 01 09:42 AM

[David White:]

AIG just had a ruling in the Starr case go against them. That's another $4.3B out the window. No wonder it's down today.

As for the overall worth of AIG, it could surprise people with a comeback. However, it is more likely that it has many, many more toxic assets. The relaxed mark to market rules have no doubt allowed AIG to hide many of the toxic assets. This is giving AIG the time it needs to sell itself. It needs to do this quickly, especially while most markets are up hugely. Anyone who is hoping for a miracle rebound from AIG is praying for a miracle. That is literally what it would take. Of course, anything is possible. A very strong economic recovery would do wonders for AIG's viability. If that happened, AIG might actually deserve its stock price. For the moment I think it is just another instance of irrational exuberance that comes at the end of a rally. If that's the case, we may see a big down move soon in both AIG and the equities markets in general.

Sep 01 10:43 AM

[montanamark:]

this is very fuzzy math. 185 bil in debt, currently already valued @ 35 bil while conducting fire sales of few remaining assets. where is the future? where is the sunny upside or is this just a trading/ short covering pinball.

Sep 01 10:55 AM

[Perry B:]

I agree with pelican on this for sure. We need to move these types of stocks off the market. AIG should be selling as pink paper. They were removed from the dow 30. Then went to .87 last time I looked then reverse split at 20/1 meaning it took 20 shares to equal one dollar of value. Now theyare trading at a hyper inflated 5. bucks er share. Profit is being taken and in reality the retail traders are being taken. Legally or it may take going to court about why they are allowed to trade. These are the stories that should be up in readers faces. AIG is a shell company and bordering on a ponzi scheme. In my opinion.

Sep 01 10:59 AM

[montanamark:]

ouch, on the timing of this article

Sep 01 12:42 PM

[andruomail:]

Isn't a lot of their government money tied up in collateral calls backing up their CDS policies? What happens if the calls are reversed?

Sep 01 12:51 PM

[bobbybutte:]

Its hard to put much credence in the barron article.They recommended the stock for a buy in feb 2008 at basis of more than 900

Trying to value AIG at thispoint is in an exact science

Sep 01 01:42 PM

[Nettligent:]

AIG core business is a perfect model in current volatile market. Bad news is we already knew about their problems. There are many hidden assests and new AIG is ready to deal with them. Hank Greenberg has a choice to turn AIG around or let his baby flushing down to toilet. He get nothing to lose but much to gain in 2010.
Despite all the challenges, mostly from city bureaucrats with all reasons, I planted 20 trees around my neighbor and public parks. Cancer, lawyers, or politicans are contagious but death will get to me first.
Our friends, kids, and neighbors working together to plant another 100 trees before back to school. Our hardwork and good planning pay off. We celebrate Labor holiday next weekend.
Everything is line up at AIG. It is a matter finalize strategy and start execution.

Sep 01 06:17 PM

[anastos:]

Nice to disclosure of holdings is alive and well here at SA.

Sep 01 11:16 PM