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Tickers in this Article: AIG, HCC, SUR, HGIC, SPY, PIC, KIE
Investors may be wondering if U.S. insurer American International Group (NYSE:AIG), dubbed by the U.S. government as an organization too important to the economy to fail, could pay off for those willing to avoid the danger signs. Let's look at why buying into AIG is a huge risk for investors and explore a couple of alternatives for investors keen on insurance providers. (For a detailed background on what caused AIG's problems, be sure to read our related article Falling Giant: A Case Study Of AIG.)

Too Big To Fail
Hearing comments about AIG being interwoven into the fabric of our economic system, making its business operation vital to the U.S. economy, is enough to make a casual investor believe the insurer is a solid investment option. The problem is with government involvement adding another layer of complexity to AIG's future, the insurer could later move into bankruptcy protection.

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If Bankruptcy Is Declared, What Happens To My Stock?
Does the sound of wind through an empty pipe sound familiar? Stockholders are at the end of the "who gets paid first" lineup of creditors, debt holders and the U.S. government. Even if AIG files for a Chapter 11 bankruptcy to restructure its debts, individual shareholders could be left with common stock worth absolutely nothing. (Learn more about Chapter 11 in the answer to our frequently asked question, What are the differences between Chapter 7 and Chapter 11 bankruptcy?)

Insurance Options
Anticipating a future upswing in the insurance industry, investors should consider the PowerShares Dynamic Insurance ETF (NYSE:PIC) or the SPDR KBW Insurance ETF (NYSE:KIE). The KIE ETF has a much lower expense ratio of 0.35% than its smaller competitor (in terms of assets), the PIC fund. However, PIC has performed the best of the two insurance-focused ETFs, losing 12.33% of its value over the past three years through March 31, while the SPDRS S&P 500 ETF (NYSE:SPY) lost 13.21% of its value over the same period.

Best Performing Holdings
A handful of the PIC fund's best-performing stocks since the beginning of the year include CNA Surety(NYSE:SUR), HCC Insurance Holdings (NYSE:HCC) and Harleysville Group (Nasdaq:HGIC). CNA Surety focuses on surety and title insurance, while HCC Insurance and Harleysville Group focus on property and casualty insurance. Each of these insurers is trading within striking distance of its book value, and for investors interested in limiting their risk, the Harleysville Group has the lowest beta ratio of 0.48 among the stocks mentioned.

Final Thoughts
Making an investment now into AIG is not worth the risk. Yes, at approximately $1 per share, large upside profits are only a few ticks away. But the looming threat of the stock falling further should not be ignored. If insurance investments are a must for your portfolio, consider dollar cost averaging into a variety of insurance-related investment options rather than chasing the high-risk payoff offered by AIG.

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