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Sunk Costs: Taxpayers Risk Going Down With Floundering AIG

Congrats, my fellow Americans -- you now own the S&P 500's worst stock of 2011: AIG. Shares in the insurance giant are down more than 50 percent on the year.

Whatever Treasury chief Tim Geithner says about AIG's secondary stock offering yesterday representing an "important milestone," the grim truth is that taxpayers are in serious danger of taking a bath on their "investment" in the company. As investor and market pundit Guy Adami told CNBC after AIG yesterday sold $8.7 billon worth of shares:

"This stock was north of $50 in December. I feel like we've been fleeced."
The feds say they didn't rescue AIG during the financial crisis to turn a profit. That's good. I can think of better ways to spend $182 billion. But after all it is Treasury that's always gassing on about what a sweet deal TARP is turning out to be for the country. So it doesn't seem unreasonable to wonder just how much money we might make or lose on AIG, or to question the agency's timing in beginning to sell down its stake.

Investors cool to AIG
The government turned a small profit -- some $54 million -- in selling 200 million share at $29 a piece. To break even, Treasury needs an average share liquidation price of $28.73. Trouble is, even after the stock offering the department still owns 77 percent of AIG. And since the agency can't summarily dump its holdings, Americans are into the company until at least the middle or end of 2012.

In the meantime, the government is expected to keep selling down its holdings every few months. So the big question is how AIG shares will hold up in the meantime. Clearly investors have their doubts about the company. Once expected to fetch upwards of $30 billion, the company's offering had to be drastically scaled down.

That flagging interest reflects AIG's weak financial performance of late and its diminished prospects. In February, the company recorded a $2.2 billion operating loss. And this month it reported that first-quarter profit fell 85 percent from the year-ago period, partly on costs related to the Japan earthquake in March, while revenue also declined.

A "lousy insurance company"
Indeed, AIG is obviously no longer the diverse insurance powerhouse it was during its heyday in the 1990s under Maurice 'Hank' Greenberg. After shedding a number of its most lucrative assets in order to repay the government, the insurer has organized around two main businesses -- property insurer Chartis and life insurer SunAmerica.

But these companies aren't exactly setting the industry on fire -- A.M. Best this spring ranking AIG as the worst-performing underwriter out of 25 property and casualty carriers it analyzed, meaning AIG pays more to settle claims than its competitors do. And although AIG's life insurance business was consistently profitable before the financial crisis, sales have steadily declined since then. One challenge facing AIG, then, is how to reverse that slide without slashing pricing or loosening its underwriting standards.

As Jim Fink of Investing Daily bluntly puts it:

AIG is a lousy insurance company.... If it continues to lose money from its primary business, its book value will erode over time. Just as retained earnings boost book value, losses erode book value. What are the chances that AIG will continue to lose money in the future? More likely than not if you believe AIG's own SEC filings.
And as he notes, if AIG were convinced that its stock is worth more than $29, why would it have joined the feds' liquidation party by selling 100 million of its own shares? There are other ways to raise capital that don't stink of desperation.


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