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American International Group Inc (NYSE:AIG)'s first-quarter report May 2 sent shares lower, but investors could be overlooking a key catalyst in the bottom half of 2018, according to Goldman Sachs.
The Analyst
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Goldman Sachs' Yaron Kinar upgraded AIG from Neutral to Buy with an unchanged $64 price target.
The Thesis
AIG's Q1 signaled to many investors that a quick turnaround in the business has not occurred, Kinar said in the upgrade note. At the same time, the company's underwriting in the "much-criticized" General Insurance business has shown signs of stabilization over the past two quarters, although it was accompanied with a lack of margin improvements, the analyst said. (See Kinar's track record here.)
AIG's General Insurance book shows that a break-even exit rate for 2018 is "achievable," Kinar said. A shift from a normalized underwriting loss to an underwriting profit is now expected in the fourth quarter of 2018, which serves as not only a "powerful catalyst" but a sign that AIG's strategy is "valid and that execution is effective," he said.
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Exiting 2018, the analyst's accident year combined ratio including the average annual loss estimate for 2019 is improved from 100.5 percent to 99.5 percent, and 2020's estimates were also improved by 70 basis points. Each 1 percentage point improvement should translate to a 22-cent-per-share boost to annual earnings, according to Goldman Sachs.
AIG's General Insurance business has been the "main source of disappointment" over the past few years, Kinar said. But an improvement in the segment as soon as Q4 will support a higher re-rating of AIG's stock over time, he said.
Price Action
AIG shares were trading nearly flat at the time of publication Thursday at $52.81.
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Photo by Marc Bryan-Brown/Wikimedia.
Crypto Whales Are Loading Up — Are You?
New research shows the biggest crypto buyers are back. And this time? They could hold for the possibility that Bitcoin will surpass $100,000 in 2024. You don’t want to miss the next massive crypto bull run like we saw in 2020 and 2021. To know exactly what’s going on and what to buy… Get Access To Benzinga’s Best Crypto Research and Investments For Only $1.