Morgan Stanley Sees 15% Upside In AIG, But Is On The Sidelines For Now

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While American International Group Inc AIG seems to have set up clear goals for 2017, there are likely to be execution challenges due to declining P&C pricing and lower investment returns, Morgan Stanley’s Kai Pan commented. The analyst resumed coverage of the company with an Equal-Weight rating and a price target of $63.

Clear Goals

AIG targets to reach ~9 percent ROE by 2017. Analyst Kai Pan mentioned that the main drivers would include:

  • 6pts improvement in P&C core loss ratio - The company’s commercial core loss ratio improved by 10+ pts in 2011-15. Pan pointed out, however, that the 2015 loss ratio of 66 percent was meaningfully above that of leading commercial lines peers. AIG aims at reducing this via business mix, re-underwriting, and reinsurance.
  • $1.6b cost savings – With general operating expenses expected to be down by ~$800m each year through 2017.
  • $25b capital returns in 2016-17 – Via dividends and buybacks, funded by core earnings, non-core divestitures and balance sheet optimization.

Execution Challenges

“AIG laid out a feasible path to achieve its financial targets. However, execution remains challenging and holds the key to the stock,” the analyst wrote. He elaborated that an improvement in the loss ratio was tough to achieve against the backdrop of declining P&C prices.

While management has some control over cost savings, a substantial headcount reduction could result in operational uncertainty.

AIG's alternative investments have led to significant earnings volatility in recent periods, and management is working towards shrinking its alternative portfolio. “Lower for longer fixed-income yields, hedge fund reallocation (~$200m impact), and potential Life Retransactions (~$250m impact) could pressure earnings,” Pan commented.

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Posted In: Analyst ColorInitiationAnalyst RatingsKai PanMorgan Stanley
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