Johnson: Swinging Away at AIG

American International Group (AIG) is my one "must buy" value stock. The stock is trading at a 40%-plus discount to book value. I know the company's past is troublesome, and yes, it required a U.S. taxpayer bailout. But I will highlight the major reasons to pick up this stock and wait for the pending appreciation. Management has developed and delivered on a profitable and reasonable restructuring plan.

Proven Management

Robert Benmosche leads the way for AIG. He was previously CEO of Metropolitan Life Insurance. He has focused upon reducing AIG's exposure to market derivatives, multi-sector credit default swaps (CDS), corporate arbitrage, regulatory capital CDS, and stable value wraps. AIG's total legacy derivative exposure has been reduced by 91% since Dec. 31, 2008.

Book Value Discount

The stock's second-quarter book value per share increased 32% in year-over-year valuation. The June 30 book value is $60.58. This is a significant increase from 2011's second-quarter $45.97 book value per share. AIG is currently selling at 56% of book value. Investors should expect the book value to increase as the U.S. government reduces its current 53% stake in AIG.

The $60.58 book value, when third-quarter data is released, should increase as management has bought back shares at a 50% discount to June 30 book value per share data. The company bought back $3 billion in AIG stock on Aug. 8. The government sold a total of $5.75 worth of AIG stock for $30.50 per share. The government is expected to sell additional shares in September. This would reduce the ownership below the 50% threshold. The company is standing on its own two feet. Management has clearly focused upon becoming a smaller entity.

Each government sale of AIG shares, and corresponding AIG share buybacks, increases the AIG book value per share. If AIG's stock price trades close to its book value per share, then the price expectation will continue to increase. The government still has a 53% stake to sell.

Focused Business Model

Management is focused on two core businesses: Chartis and SunAmerica Financial Group.