American International Group Inc (NYSE:AIG) announced a new $2 billion buyback authorization today, significantly lower than the $2.4 billion net cash proceeds from the sale of International Lease Finance Company (ILFC) that many investors expected to be rolled into company’s buyback program. Assuming this is the final buyback authorization for 2014, $3.4 billion in full-year buybacks will come in $500 million short of Sterne Agee projections.

AIG

“Considering what is universally viewed as strong free cash flow generation, combined with the net proceeds from the recent closing of the ILFC sale, we believe the Street will view the authorization as modestly disappointing,” writes Sterne Agee analyst John M. Nadel (with Dan Farrell, and Nitin Chhabbra).

But the pace of buybacks has actually been in line with management guidance, and Nadel contends that investors expect too much because they are overestimating American International Group Inc (NYSE:AIG)’s book value.

Bullish investors not considering the net present value of DTA

In 2010, American International Group Inc (NYSE:AIG)’s book value excluded accumulated other comprehensive income (AOCI) a part of shareholder equity used to measure unrealized profits and losses. It also excluded deferred tax assets (DTA) with a valuation allowance because management wasn’t convinced that it would become profitable enough to make use of them before the DTAs expired.

Once earnings started to improve, the DTA was added to GAAP earnings without discounting at $15 per share, but Nadel argues that it’s really worth about $8 on a net present value basis. Investors who say that American International Group Inc (NYSE:AIG) is trading at a deep discount are comparing its $55 stock price to a book value of more than $70 per share. But Nadel says that a more accurate assessment strips out the $15 DTA and $6.28 in AOCI and adds back the $8 NPV of DTA for a book value of $59 per share.

AIG: Lower book value estimates may explain modest buybacks

“While the stock is still below this view of book value, at 93% it’s not nearly as cheap as some might otherwise believe, particularly when taking into account a relatively modest and well-below peer group operating ROE around 8%,” writes Nadel.

If American International Group Inc (NYSE:AIG) management is making the same assessment as Nadel, then buybacks aren’t terribly appealing, and the slower pace starts to make sense. The different P/B estimates also explain why some analysts are so bullish on AIG while Nadel rates it Neutral with a $56 price target.