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AIG: The Real News Isn't Good

American International Group shares have climbed back above $30 a share on news that the ailing insurer is cutting its debt to the Federal Reserve by $25 billion by - essentially - giving the Fed two crown jewels it plans to sell off.

AIG has been drowning in debt and paring it down is essential. But it's not new news. The swap of debt for equity in these two units, Asian-based American International Insurance and American Life Insurance, was announced in March while Ed Liddy was still CEO.

The real news came earlier this week when Sanford C. Bernstein analyst Todd Bault warned that AIG might not have enough reserves to pay its property and casualty insurance claims. By Bault's math, AIG has a shortfall of more than $11 billion. That news sent its share price down to $28.

Aside from deals involving the government, which seems to be the only interested party in AIG at the moment, things do not look good. In fact, its major business units, life and property casualty insurance, are both bleeding revenue. As National Underwriter points out, property insurers are coming up on renewal season and buyers are unlikely to do business with a company that may not pay its claims. Ominously, he says, AIG has not answered Bault. According to Bloomberg News, AIG's brand is "tainted," even in overseas markets like the United Kingdom where the insurer used to be secure.

Turning these two insurance units over to the government - through special purpose vehicles - will leave AIG with a massive charge of $5.7 billion, virtually wiping out any profit the insurer might sustain in the fourth quarter, and further complicating its already obtuse earnings report and balance sheet. Options traders love this stock but, more to the point, analysts don't. Only three analysts have current earnings estimates on it, which should tell you something.

There is probably real value to be had in this sleeping giant that once had or controlled assets worth a trillion dollars. The Federal Reserve and the U.S. Treasury apparently thought so when they rescued AIG in the fall of 2008. But market value really tells the story. AIG's market capitalization is $4.2 billion and it still owes taxpayers $61 billion. Speculate at your own risk.

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