AIG - grounded enthusiasm - FT.com When a company's majority shareholder announces that it will dump most of its position, a big share price hit usually follows. Yet AIG shares responded with equanimity to news that the US Treasury would sell $21bn of its stake, more than a third of the company's market capitalisation. The Treasury had already sold $23bn in shares in small chunks. But the latest sale is much bigger than expected and the response shows how bullish investors remain on the stock, which is up nearly 50 per cent this year. The enthusiasm is grounded in the wind-down of government ownership, non-core asset sales, tax assets, and a share buyback plan that is highly accretive because of the stock's low valuation. Each block of shares the government sells without crushing AIG's stock increases the likelihood that the rest of the stake will be sold smoothly. This is a legitimate source of investor confidence. Similarly, it is fair to incorporate the company's deferred tax asset (estimated by William Blair research to have an economic value of $6.45 a share) into the valuation, assuming that AIG remains profitable. And the non-core assets, most prominently the $6bn stake in Asian insurer AIA, are a major source of value - assuming the market for Asian growth assets remains strong. The buyback is more problematic: accretiveness always is. Yes, AIG is trading at half of book, making buybacks very accretive to book value per share. But what matters to an insurance company is ultimately not the excess value of its assets over its liabilities. It is its ability to earn more on its assets than it must pay on its liabilities, as reflected in its return on equity. And AIG's mid-single-digit ROE is well below that of peers. AIG is not buying dollars for 50 cents. It is using cash to achieve what, for the time being, operational excellence cannot.