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Is AIG Overpriced? Maybe 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, 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 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 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.

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