KBW Upgrades AIG To Outperform; Recent Weakness Creates Valuation Opportunity

• American International Group Inc AIG shares have appreciated 4.32 percent year to date, rising almost to their 52 week high, at $64.12, on December 1.
• Meyer Shields of Keefe, Bruyette & Woods has upgraded the rating on the company from Market Perform to Outperform, while raising the price target from $65 to $72.
• Shields believes that the recent shake up in the senior management has led to a weakening in investor confidence, thereby creating a valuation opportunity.

Analyst Meyer Shields also mentioned, however, “We’re still pessimistic about the prospects of the current expense-focused strategy, and we also don’t see too much unrecognized value in AIG that can be “unlocked” by splitting it up or selling individual units.”

On the other hand, Shields believes that the intense public scrunity being done by activist investors of the company’s CEO, Peter Hancock, would add pressure on him to take “more drastic steps” to create shareholder value, such as withdrawing from the P&C businesses.

Shields believes that the P&C underperformance, especially in the Commercial businesses, is the biggest issue being faced by AIG.

Addressing this issue would need the company to first acknowledge that it cannot compete profitably across some of its large lines of business, especially Other Liability, “where the gap between its loss ratios and those of its main competitors’ are both huge and growing.”

Although AIG’s loss rations in the Fire and Inland Marine business have consistently been better than that of the other top 10 insurers, performance of the Workers Compensation and Commercial Auto Liability segments have been “less impressive,” while Other Liability lines have consistently underperformed.

“We expect pricing for these lines to deteriorate throughout – and probably beyond – 2016, making it increasingly unlikely that AIG can turn its performance around,” Shields added.