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It's Back to Business for AIG, But Can Investors Forgive and Forget?

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Not sure how many American's will say "no problem, glad to help," after receiving a hearty "thanks" from AIG (NYSE: AIG  ) President and CEO Robert Benmosche today. The $182 billion bailout package AIG received from the U.S. Treasury a little over four years ago still rankles many, and always will. But if Benmosche and AIG have their way, it's time to move on.

Not that it will matter to investors who avoid AIG on principle, but it turns out "we" made a nearly 12.5% return on the deal, after the U.S. Treasury sold its remaining 232 million shares, priced at $32.50. The $7.6 billion proceeds from this last sale of AIG stock, just about ends the government's involvement. The only thing left now is for Treasury to rid itself of warrants for 2.7 million shares, and our hands are clean. Now that it's all said and done, the 12.5% total return on the AIG investment works out to a $22.7 billion gain. Not great for a four-year investment, but it sure beats the alternative.

From Benmosche's mouth, to anyone's ears?
Here's what the AIG CEO had to say: "We are very pleased to repay 100 percent of all that America invested in AIG plus a total combined positive return -- or profit -- of $22.7 billion," Benmosche added, "On behalf of the 62,000 employees of AIG, it is my honor and privilege to thank America for giving us the opportunity to keep our promise to make America whole on its investment in AIG plus a substantial profit. Thank you America. Let's bring on tomorrow."

"Bringing on tomorrow" is a good idea for AIG shareholders, or investors considering the $49 billion insurer. There's a lot going on at AIG, beyond cutting ties with the government. The recent shedding of the majority of its stake in International Lease Finance (ILF) will net $4.23 billion (equal to 80% of ILF), with an option to sell another 10%. But the real value to AIG of the ILF sale to New China Trust is ridding itself of non-core assets. Airplane leasing is a nice business, but AIG is an insurance company, first and foremost.

The impact of Sandy, as AIG announced Dec. 7, will be significant. An estimated $1.3 billion net loss will show up in AIG's Q4 earnings announcement, so don't be surprised to see sequential, quarterly losses -- it happens with losses of Sandy's magnitude. It should be noted the $1.3 billion loss is after AIG receives benefits from its reinsurance policies. The upshot is AIG will cover the expected losses from existing funds, and with over a $100 billion in equity, a billion-three isn't debilitating.

So, now what?
Benmosche and AIG's turnaround team continue to perform, first for the government, and now for the general public. Its strategy is simple; get back to doing what AIG does -- sell, service, and invest the premiums, from its life and property insurance coverage. Of course, the successful implementation of even the most obvious of strategies is where the rubber meets the road, but it's clear AIG is making significant strides.

Investors are finally able to compare and contrast AIG's financial results vs. its competition. The massive tax incentives, which AIG enjoyed earlier in the year, aren't part of the equation any longer. In AIG's most recent quarter, it actually paid $901  million in taxes, compared to receiving a tax benefit of $1.975 billion in Q3 of 2011. Just as significantly, the albatross that was the government's ownership of AIG is (at last!) no longer.

Even with its nearly 44% gain year-to-date, AIG remains one of the best values in the industry. Though AIG's 2.3 times trailing earnings is skewed -- primarily from the aforementioned tax benefits -- its forward P/E is only 9. Measures, including ROA and ROE, blow American Financial Group (NYSE: AFG  ) , Travelers (NYSE: TRV  ) , and Chubb (NYSE: CB  ) out of the water. What AFG, Travelers and Chubb have that AIG lacks are dividends in the 1.5% to 2.5% range. Right now, an investment in AIG is about growth; income may come down the road, but that's not where the opportunity lies.

As with most insurance companies, AIG's results are as much as about its ability to generate investment returns on its portfolio, as it is about premiums and minimizing claims. With that said, a slowly improving economy and consumer confidence, along with a strengthening housing market, all bode well for AIG in 2013.

The sale of ILF, its return to core operations, and relative value to its competitors, are cited by the many analysts that rate AIG a buy right now. Deutsche Bank, Sanford C. Bernstein, and Macquarie have price targets for AIG ranging from $41 to $45 a share. At its current $34 a share, give or take, that's a lot of upside for AIG -- if you're able to forgive and forget.

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