This Was Once America's Most Hated Company

The company America loved to hate may now be one investors might like to buy. American International Group (NYSE: AIG  ) , one of the "too big to fail" financial companies the U.S. government bailed out in 2008, has recovered from its near-death experience. It's alive, if not completely independent, and has just reported a second-quarter profit.

Most of the company's gains, however, came from its share of American International Assurance, the Hong Kong-based life insurance company. Other parts of AIG's business didn't fare as well. Chartis, its casualty insurance business, took losses of more than $500 million after paying off claims from natural disasters. Its American life insurance division, SunAmerica Financial, dropped its operating income by more than 18%. And AIG's aircraft leasing business's operating income fell by more than 50%.

Good riddance, Financial Products
But the welcome news came that the company has finally closed down its problem child, AIG Financial Products. That was the unit that wrote credit default swaps (essentially, investment insurance) to cover tens of billions of dollars in collateralized debt obligations, or CDOs. Many of those CDOs covered bundles of subprime mortgages. When AIG couldn't cover all the losses as housing prices fell and many of those CDOs defaulted, the government stepped in with its $182 billion rescue, the biggest U.S. bailout ever.

AIG has been paying off the debt, but we taxpayers still own 77% of the company, down from 92.1 percent originally.

Suing the banks
AIG sued Bank of America (NYSE: BAC  ) this week to recover $10 billion in losses from its investments in mortgage-backed securities. The company contends that Bank of America, Merrill Lynch, and Countrywide duped the ratings agencies into assigning inaccurate ratings to those investments.

AIG would also like to get some of its money back from the other financial institutions the company says misled it leading up to the financial crisis. It is readying lawsuits against Goldman Sachs (NYSE: GS  ) , JPMorgan Chase (NYSE: JPM  ) , and Deutsche Bank (NYSE: DB  ) .

Is AIG really worth considering?
First of all, I have to agree with fellow Fool Dan Dzombak that AIG is a beckoning contrarian play. A classic out-of-favor, overlooked, tainted, undervalued stock that only someone comfortable with going against the grain would ever consider buying. Sounds like my kind of stock. Right now, AIG is trading at about one-third of its January 2011 price, and its trailing P/E is 6.4.

Next, Financial Products is dead. 'Nuff said about the derivatives unit of AIG that almost sank the company. Don't let the door hit you in the back.

And finally, AIG was once a highly profitable insurance company. I think if it sticks to what it knows best, it will become one again.

Hope for the best...
Despite the mixed second-quarter results, AIG's CEO, Robert H. Benmosche, told The New York Times last week, "AIG is basically back in business. The crisis is over for this company." If it really is, then buyers could be getting a bargain. When my Foolish trading restrictions allow me to buy shares in AIG, I intend to do so.

If you are interested in keeping track of American International Group, too, then click here to put it on your watchlist.

Fool contributor Dan Radovsky has no financial position in any of the companies mentioned ... yet. The Motley Fool owns shares of American International Group and JPMorgan Chase. The Fool owns shares of and has opened a short position on Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 11, 2011, at 11:01 PM, Abigsoxfan wrote:

    Things at their Chartis division are most likely worse than they appear. After decades of under-pricing their P&C business they are loaded with loss reserves that are so understated they needed to be increased by several billion in each of the past two years and most likely have much more strengthening needed for years to come. Which will kill their earnings for years to come. Contrarian investing only works when the market has unfairly valued a company. The huge uncertainty surrounding Chartis' loss reserves may have actually overvalued this stock rather than undervalued it. Best to stay away form this stock until it becomes more apparent how well valued their old loss reserves truly are. The last two years they have been billions off. To believe they suddenly have it right is a huge leap of faith.

  • Report this Comment On August 12, 2011, at 4:25 AM, memoandstitch wrote:

    Did you count that unusual income of $17B in its trailing P/E?

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