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Dear Mr. Berko:

Dear R.E.:

A logical man would never marry, write poetry or fall in love. A very wise man (my dad) used to say: “If you allow logic to govern your life, you will have a very boring life.” So listen to your gut. It has a way of processing information at lightning speed more efficiently and often more accurately than the hypothetical perambulations needed for a logical conclusion.

I think American International Group Inc. (AIG-$44) is a forthright, downright, outright, flaming “buy.” The subprime mortgage mess figuratively and literally decimated this classy insurance conglomerate as well as the market values of the other financial service companies that trade on the Big Board and international ex-changes. In mid-October, AIG was doodling happily along at $70 a share when – whammo! – the stock began to fall like a coconut from a sky-tall palm tree, all the way to less than $44 a share.

This 30-point crash shook $60 billion from AIG’s market cap in three months and generated record trading volume for the stock. Like many doctors who order myriad tests to avoid any possibility of lawsuit, the nerdy accountants said AIG overexposed itself to $63 billion of collateralized debt obligations backed by subprime mortgages. They insisted on a fourth-quarter write-off of $5.2 billion from earnings.

However, this $5.2 billion “mark-to-market” does not affect AIG profitability or its book value. In fact, as new light shines on AIG’s balance sheet, it’s easy to see that those nervous nerds grossly overreacted, and that most (if not every penny) of that fourth-quarter charge will be reversed and flow back to earnings in the next two years. That huge charge revolves around some cryptic, abstruse accounting issues that effete uptight bureaucrats love to fantasize about but have almost zero effect upon AIG’s portfolio performance.

So despite the brutal carnage, two analysts whom I respect believe that AIG will earn $6.70 a share this year. At the current $44 price, AIG is trading at an absurdly low 7 percent premium to book value and an extremely attractive 6.6 times expected 2008 earnings. Those numbers are quite attractive compared with industry numbers. In fact AIG’s gross margins, its operating margins and net profit margins are well above the industry’s averages and are significantly better than those of its closest competitors. AIG’s current price is very attractive for those who will be long-term buyers.

With 20 consecutive years of premium growth, with earnings increasing during 18 of those 20 years and dividends increasing in 19 of those 20 years, AIG lays claim to some very impressive numbers. I’m impressed enough with this insurer that I’ve recently recommended this issue for many retirement accounts.

I believe it could trade over $100 a share in the coming four to five years and because I believe that revenues, earnings and dividends will also increase in each of those coming years. I’m convinced that this subprime fiasco will prove that it’s still possible to find a silver lining in a dark cloud. I recommend that you do the same.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.© Copley News Service