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The Treasury Is Profiting From AIG. Can You?

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The four-year anniversary of the Treasury's takeover of AIG (NYSE: AIG  ) is upon us. It doesn't seem like that long ago we (the U.S. taxpayer) ponied up a cool $182 billion to salvage the mess AIG had become. The 92% of AIG the government owned after the massive cash infusion raised the ire of more than a few Americans, and still does. But here's the thing -- it turns out the Treasury's investment has been performing pretty darn well these days.

Is it time to let bygones be bygones? If you're in need of growth, and can ignore that unpleasant taste in your mouth, the answer is a resounding yes.

Heading in the right direction
As initially conceived, the plan was for AIG to use the massive funds from the bailout package to fund the largest fire sale in the history of mankind. But something happened on the way to the auction block. A new management team-led by CEO Robert Benmosche -- changed AIG's focus to life insurance and property coverage, then, lo and behold, it started generating consistent profits. As a result, shareholders have enjoyed a 46% jump in stock price this year.

In addition to its return to profitability, AIG's management team continues to put forth a concerted effort to pay off its debt to the U.S. government. After several stock sales in the past month, the 92% of outstanding shares owned by the U.S. taxpayer after the cash infusion has been trimmed to 53%. And recent moves to sell assets will reduce that percentage even further.

Does all of this absolve AIG from the mistakes that came to a head four years ago? Of course not, and there are investors that will never forgive (or forget). But even the most adamant of naysayers must admit, AIG is taking definitive steps to deliver on its responsibilities.

How AIG is doing it
Benmosche and the AIG management team is paying back taxpayers and solidifying the balance sheet in a few ways. No. 1, AIG intends to sell another 600 million shares of its stake in Hong Kong-based insurer AIA. The sale will net about $2 billion, and reduce AIG's ownership stake to 13.6%. The plan is to use the proceeds, along with some ready cash, to buy back another $5 billion in shares from the Treasury.

After the agreed upon 90-day holding period, don't be surprised to see AIG sell even more shares of AIA on Hong Kong's open market. If the rumors are true, AIG will own less than 5% of AIA by year's end, and bring even more outstanding shares back into the fold.

No. 2, with a string of solid quarterly financial results under its belt, AIG decided to use its newfound financial strength to issue several debt instruments, the latest coming this past May. And the bonds have been an outstanding success for investors and for AIG. The $1.5 billion 10-year bond offering in May is a good example of the positive investor and analyst sentiment. Initially sold at a rate of 4.875%, the price has consistently risen, driving the yield down to its current 3.75%. In fact, AIG has been rated one of the top debt issuers in the country by Gimme Credit. Quite a turnaround, to say the least.

No. 3, AIG still garners huge tax benefits from the bailout: Specifically, the terms in which the U.S. government assumed its controlling interest. Most takeovers (or bankruptcies) don't allow the acquired company to use net operating losses to offset income. Not so with AIG.

Including unrealized investment losses, AIG had a total of over $36 billion in losses, or what amount to tax benefits. AIG's Q4 announced in February is an example of just how huge that "little" deviation from normal SEC regulations was. Of the $19.8 billion in profits AIG realized in Q4, $17.7 billion of it was courtesy of the U.S. government in the form of a tax benefit. Needless to say, the favorable tax situation remains a sticking point for many.

Where does this leave investors?
Almost across the board, AIG is still (after this year's run-up) a ridiculously good investment value. Key competitors of AIG, including American Financial Group (NYSE: AFG  ) and HCC Insurance (NYSE: HCC  ) , though not outlandishly priced, are all significantly more expensive than AIG on a forward earnings multiples basis.

For many investors, AIG will remain blacklisted forever; that's the reality Benmosche and his team lives with. But if you're able to get past its recent history and focus on the future, AIG is ideally positioned for considerable growth.

Just as AIG is working toward its long-term plan of reimbursing the U.S., investing for the future requires developing a long-range strategy. For a Fool's view of how to plan for, and meet, your retirement objectives, take a look at the special free report "3 Stocks That Will Help You Retire Rich."

Fool contributor Tim Brugger currently holds no securities positions, including any mentioned in this article. Motley Fool newsletter services have recommended buying shares of American International Group. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (1) | Recommend This Article (2)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 07, 2012, at 10:23 AM, constructive wrote:

    "it started generating consistent profits."

    Right. It's profitable 55% of the time, every time.

    "AIG's management team continues to put forth a concerted effort to pay off its debt to the U.S. government. After several stock sales in the past month, the 92% of outstanding shares owned by the U.S. taxpayer after the cash infusion has been trimmed to 53%."

    You're not doing your readers any favors by misrepresenting "equity" as "debt".

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