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AIG's Comeback: One of the Market's 2010 Top Performers

Source: WSJ

Posted on 29 Dec 2010

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Shares of bailed-out American International Group Inc. (AIG) have defied critics and rallied to become one of the market's top performers in 2010.

AIG's publicly traded shares closed 45 cents lower at $58.93 on Tuesday, capping a nearly 97% gain in the year to date and over 42% in December alone. The insurer is the fourth-best performer in the S&P 500 index this year.

AIG's gravity-defying performance has occurred as the company reached key milestones in its complex restructuring It sold two large overseas units, shed risky businesses, regained access to the bond markets, and obtained new credit lines from banks to replace its funding from the government. Investors are now anticipating the U.S. will be able to sell a 92% stake in AIG, recoup its $182.3 billion bailout, and leave behind some value for private shareholders—an outcome that was highly improbable early in the year.

Now, there is even potential for upside after AIG completes its asset sales, which are expected to raise over $50 billion. The company is close to choosing a buyer for its Taiwanese unit, Nan Shan Life Insurance Co., which could fetch over $2 billion. Securities AIG acquired in a deal with MetLife Inc., and its remaining stake in pan-Asian insurer AIA Group Ltd., have also gained in value, notes Andrew Kligerman, an analyst at UBS Investment Research, who has a "neutral" rating on AIG. "AIG has lost luster given its global divestitures—but it is clearly still an important and prominent company," he said.

The stock move is deceptive in some regards. Each AIG share today used to be 20 shares before the company's near-collapse. If AIG hadn't conducted a reverse stock split last year, its share price would be about $2.95, compared with $57.94 three years ago. In December 2007, AIG had a market value of above $150 billion. Following its liquidity crisis and government rescue in 2008, the value of its common shares fell to a low of $1 billion in March 2009.

Today, private investors in AIG own common shares worth a total of $8 billion, and the current share price includes the value of warrants the company plans to issue to private shareholders. In the coming months, the Treasury Department intends to convert preferred AIG shares into over 1.6 billion common shares. All told, AIG has a total implied market value of over $80 billion, reflecting how it has slimmed down, but it remains a large insurer with a global property-and-casualty insurance business and a leading domestic life-insurance and retirement-services group.

Whether that $80 billion market value can be sustained over the next two years will depend on investors' willingness to buy AIG shares when theTreasury tries to unload its AIG ownership. To break even on its investment, the U.S. needs to sell its shares at above $30 apiece. If it sells at $45, taxpayers could earn a profit of over $20 billion. If the U.S. tries to sell too much too quickly, the stock price could still collapse.
AIG shares have gained despite bearish views of the company's value from some analysts and short-sellers.

In late April, when AIG was trading around $44, Cliff Gallant, an analyst from Keefe, Bruyette & Woods, labeled the stock "grossly overvalued" and pinned a $6 price target on it. Even that target was "optimistic and somewhat implausible, requiring an exit of government interests which we believe may not be executable," he wrote in a report.

UBS's Mr. Kligerman that month estimated AIG's "fair value" at $31 a share. He placed a "neutral" rating on the stock and a $40 price target, which he said factored in a possibility that the government would restructure its stake in AIG at terms favorable to private shareholders.

Mr. Kligerman says he was quickly deluged by phone calls and emails from short-sellers, some from hedge funds betting against AIG. "They were furious," he recalls, adding he had never gotten so much negative feedback in his 16-year analyst career. "I had very heated arguments with some of them, and I wasn't even recommending that people buy the stock."

The following month, KBW's Mr. Gallant told a congressional oversight panel investigating the AIG bailout that the government would have difficulty recouping all its money. "If the taxpayer is expected to take a loss, how can there really be value here ... in the company?" he said, according to a transcript.

AIG Chief Executive Robert Benmosche spoke to the same panel in May. AIG is "worth a lot of money. I can't tell you how [others] do their analysis.

But I am confident you're going to get your money plus a profit," he declared. Over the last few months, Mr. Benmosche was deeply involved in negotiations with the government over how the U.S. could exit its ownership without letting the stock collapse.

On Nov. 15, Mr. Gallant raised his 12-month price target to $17.50 after AIG completed sales of its foreign life-insurance businesses and mapped out a plan to end its reliance on U.S. aid. He still sees many challenges ahead for AIG, including the "large obvious overhang" from the government's stake, his report said.

UBS's Mr. Kligerman, meanwhile, still has a neutral view on AIG, but recently raised his price target to $53, or about $44 excluding the value of warrants that company plans to give private shareholders as a sweetener.

Over the last few days, as AIG's share price climbed, Mr. Benmosche, who has been diagnosed with cancer but is hoping to see the government exit from AIG, said he has been thinking back to his testimony during daily three-mile runs.

"I was wondering if I might get a call from someone saying maybe 'you were right,' because we look better than we did last May and we can see the finish line from here, and it comes with a profit for the taxpayers," Mr. Benmosche said in an email. "But as I learned in [Ayn Rand's book] 'Atlas Shrugged,' find your Thank Yous from within."