When an investor with an estimated net worth of $11.2 billion loads up on a stock, it pays to ask why. In this case, it's hedge fund manager John Paulson loading up on $860 million worth of American International Group (NYSE:AIG) stock in the first quarter of this year.

A company on the mend
AIG is one of the largest insurance companies in the U.S., but unfortunately it is more commonly known for its role in the financial crisis and the $182 billion government bailout required to keep this systemically important institution out of bankruptcy. 

AIG Chart

AIG data by YCharts

Since those dark days, the company has by and large turned itself around. The Treasury Department completed the sale of all of its AIG shares in December 2012, exiting its ownership position with a net gain of over $22 billion.

The stock is up 151% since Dec. 31, 2009 and has beaten the S&P 500 over both the last five and one year periods. AIG is up over 12% year to date in 2015.

Further, the company has announced plans to return between $6 billion-$7 billion to shareholders this year. Some analysts think that number may continue to rise since AIG recently sold off an equity stake in AerCap Holdings, an airplane leasing company. That sale raised about $4 billion and the windfall is likely to be transferred to shareholders through a combination of an increase in share buybacks and a special dividend. AIG management has not yet announced any such plans, however.

Today AIG is smaller and more focused than it was in the years preceding the financial crisis. Businesses outside its primary focus of property and casualty insurance and life insurance are steadily being sold off or wound down. That includes a major reduction in the insurer's portfolio of credit default swaps, the complex derivative contracts largely behind its near collapse during the crisis.

CEO Peter Hancock is shifting the culture at AIG along these lines, focusing on underwriting quality insurance policies, cutting costs, and focusing the insurance giant on its core businesses. This management approach stands in stark contrast to the aggressive and risky growth initiatives that characterized AIG before the crisis.

Earlier this month, a lingering lawsuit filed by pre-crisis AIG shareholders concluded in favor of current AIG shareholders. The lawsuit sought $40 billion in damages claiming that the government overstepped its legal limits when bailing out AIG and unlawfully wiped out shareholders. The judge ruled that the government did overstep the law, however no damages were awarded. The stock popped 1% higher on the ruling because it removed such a potentially large financial liability from the company's risk profile.

One word of caution
The last few years have seen a tremendous improvement at AIG. However, before investing today one must consider if those improvements are likely to continue in and keep the stock moving upward.

Analysts at Deutsche Bank made this point recently, downgrading AIG from "buy" to "hold." They note that the stock's recent strong performance has likely brought the company's valuation to a reasonable level, meaning that the potential short-term upside is low. Their conclusion is that AIG will trade at it's current level as long as return on equity remains at its present level.

The average holding period for a position in John Paulson's hedge fund is about 16 months. That indicates to me that he sees both a medium term and long term upside in AIG, and he's confident enough in his analysis to invest 4.2% of his fund in this recovering insurer.

In my view, AIG remains an attractive investment for the long-term investor. It's impossible to say how the stock will perform over the short-term, but the marked improvements in the company's business model, risk profile, and management approach should lay the foundation for years of sound returns to come.