What Kind of a Bargain Is AIG?


By Heather Timmons Since AIG CEO Maurice "Hank" Greenberg announced Feb. 3 that the world's largest insurer would take a $1.8 billion charge to add to reserves, AIG's (AIG) stock has fallen more than 10%, closing at $50.46 on Feb. 27. Is it now cheap enough for investors to buy?

Don't make any sudden moves, most analysts say, without taking several factors into consideration. First, investors will want to know whether AIG's recent charge is its last, or whether the insurer might have more surprises down the road. The answer isn't certain.

Some analysts worry that AIG is still underreserved when it comes to one of the biggest recent threats to insurance industry profits -- asbestos claims. While peers like Travelers Corp. and ACE (ACE) have taken billion-dollar charges in recent months to raise their reserves for asbestos liability, AIG has yet to address the issue, the analysts say. AIG's so-called survivability ratio for asbestos liability, a ratio of reserves divided by claims paid out for asbestos over the past three years, is just four years -- less than a third of most of its peers.

ASBESTOS BURN? Longtime CEO Greenberg has said asbestos isn't a problem for the company and that it's adequately reserved. Still, some investors worry that credit-rating agencies like Fitch Investors Service or Moody's Investors Service could force AIG to up its asbestos reserves to maintain its cherished AAA rating, the highest investment-grade rating available.

In fact, both Moody's and Fitch put AIG's corporate debt on "ratings watch negative" after the insurer took its Feb. 3 writedown. Analysts at these firms say that asbestos isn't their only, or even their top, worry. "Clearly asbestos is snowballing to the point where anyone with exposure gives us concern," says Michael Barry, a Moody's analyst. But, Barry adds, AIG is one of the last insurers he expects to have to take writedowns from asbestos litigation.

Instead, Barry and others are worried about the core life and property and casualty businesses. "Our big concern is that the Feb. 3 charge is indicative of the current environment that AIG operates in," says Barry. "It suggests that perhaps even the best player in the property and casualty sector can't be a triple-A player because of jury awards and overall court costs."

IMPOSSIBLE QUEST? For his part, Greenberg seems to be hitching AIG's prospects partly on Washington. But he may not get relief there -- at least in the short term. Since Feb. 3, Greenberg has dramatically increased his vehement calls for tort reform. He's hoping to get congressional support for caps on class-action lawyers' fees and limits to where suits can be filed.

Some veteran insurance industry analysts say despite Greenberg's ardor, they don't expect any nationwide limits to be imposed in the near term that would help the insurance industry. "It's tort reform déjà vu," says Bear Stearns analyst Michael Smith. In the 1980s, limits were placed on some of the very things Greenberg is calling for by state courts. "One by one, those state reforms were overturned in the Supreme Court," explains Smith.

Another area that may concern investors is terrorism insurance. AIG, like other insurers, is being forced by the government to offer some form of terrorism insurance to customers. In return, the government will absorb some losses. Still, ratings agencies say they're watching the sector closely. "With any new line of business where there's no historical track record of losses, companies and analysts have to be leery," explains Julie Burke, an insurance analyst with Fitch.

TRUMP PLAY. AIG also is having a bit of a dust-up with one big customer. On Feb. 21, real estate magnate Donald Trump told the New York Post that he was shopping around for a new insurer for his property portfolio because AIG's prices are too high. "It would seem to me unlikely that AIG would be able to compete with the kind of numbers we've been given by other competitors of theirs," Trump said later to Reuters.

AIG spokesman Joe Norton says Trump is railing against AIG's rates because he's upset that AIG didn't buy into a junk-bond deal he issued. Trump has publicly denied that that's the case. He could not be reached immediately for further comment. Analysts say the loss of Trump's premiums wouldn't be enough have a significant impact on AIG's bottom line if he finds a new insurer. Yet the publicity isn't helping AIG.

Nervous investors also may be put off because Greenberg, who is healthy but in his 70s, hasn't formally named a successor. He has said repeatedly in recent months that the board knows who his successor is, and that he or she will be revealed in due time.

Despite all these immediate negatives, AIG at its reduced price may still be a bargain for long-term investors. "I've been telling people to buy all the way down," says Bear Stearns analyst Smith. Agrees DeutscheBank analyst Alian Karaoglan: "There's value in AIG, and it will be up from these levels." But, he adds, other stocks in the sector may offer better opportunities. If you opt for AIG, be prepared for a bumpy ride over the next few months. Timmons covers insurance and banking for BusinessWeek in New York


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