AIG's Value Becomes Moving Target

The value of AIG has always been difficult to determine, but that's true even more so now that the insurer is selling two foreign subsidiaries.
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NEW YORK (TheStreet) -- American International Group (AIG) - Get Report remains shrouded in a complex web of companies.

With the pending sale of the insurer's foreign units, AIA and ALICO, figuring out AIG may become even harder.

Understanding AIG is barely easier than it was when the Federal Reserve Bank of New York bailed out the insurer in 2008 and 2009. In all, the U.S. spent almost $200 billion to keep AIG from going under. We now know that, ultimately, AIG will not be allowed to fail.

When AIA and ALICO are sold, an enormous amount of the bailout will have to be repaid. Upon completion of the $35.5 billion sale, AIA will have to repay $16 billion as well as 1% of the net proceeds, or about $195 million.

AIG has said the sale will leave it with $10.5 billion in securities and

Prudential

stock, with about $9 billion remaining for further debt reduction.

The anticipated ALICO sale to

MetLife

(MET) - Get Report

, expected to close by yearend, was confirmed yesterday. The price is about $15.5 billion, with only $6.8 billion to be paid in cash.

When the sale is completed, AIG will still owe $2.2 billion for preference shares held by the U.S. In addition, it will have to pay $300 million for the government's 5% share of net proceeds. The repayment will be made from disposals of MetLife equity included in the sale.

After the foreign units are sold and repayments made, AIG will have netted about $25.5 billion, $8.8 billion of which is cash and the remainder stock and equities.

The effect on AIG's balance sheet hasn't been made public, but it doesn't appear to represent a big win for AIG. ALICO had $87 billion in assets in September, representing more than 10% of AIG. It generated $11.5 billion in premiums and investment income in the first nine months of the year.

The net price for ALICO is $6.2 billion in stock. AIG's 2009 10-K filing said the insurer would have to review whether there was any goodwill impairment resulting from ALICO's sale.

AIA's balance-sheet value also isn't known, but given the sale price, it would appear that it exceeds ALICO's. What will remain, following the disposals, is a weaker company. AIG will still have the headache of closing down its financial-products unit in 2010. The millstone of ILFC, the aircraft-leasing arm, is unable to obtain sufficient funding.

Chartis and SunAmerica, the rebranded property and casualty and life and annuity groups, will form the core of the slimmed-down AIG. The two subsidiaries recorded net operating losses of $1 billion in 2009, and SunAmerica received $2.4 billion in bailout funding to re-capitalize the group's balance sheet. SunAmerica's life premiums totaled $24.9 billion in 2008, or 16% of the market, plummeting to $3.7 billion, or 2.8%, last year, according to SNL Financial.

AIG stock has traded around 70% of its book value since September. As AIG shrinks, the price should reflect the value of the smaller asset base. In addition, the insurer has significantly reduced its ability to generate income with divestitures.

Given the circumstances and the continued losses ($10.9 billion in 2009), the reduced future cash flows and the smaller asset base, investors need to consider the price. A 30% to 40% discount on an average price of $25 appears fair, leaving a price of around $15.

-- Reported by Gavin Magor in Jupiter, Fla.

Gavin Magor is the senior analyst responsible for assigning financial-strength ratings to insurance companies. He conducts industry analysis and supports consumer products. Magor has more than 22 years of international experience in operations and credit-risk management, commercial lending and analysis. His experience includes international assignments in Sweden, Mexico, Brazil and the U.S. He holds a master's degree in business administration from The Open University in the U.K.