The team of analysts led by Paul Newsome listed as many as five reasons behind the upgrade, starting with the reducing overhang on the shares from the government ownership.
At the current price of $29 per share, the government's stake is valued at $30.75 billion. Assuming the public continues to participate in half of each public offering, AIG would have to raise about $15.4 billion to repay the government's stake, according to the analysts.
AIG should be able to raise this sum through a combination of the proceeds from the NY Fed's sale of Maiden Lane III assets, sale of AIA shares, the IPO of its leasing arm International Leasing and Finance Corporation and about $4.5 billion in retained earnings, Newsome estimates.The stock has also proved to be more resilient, with shares holding up at the $29 level in the last government offering of shares, the analysts noted. Third, the insurance operations were doing better than expected, as evidenced by the fourth- and first-quarter results. AIG's low return on equity compared to its property and casualty peers and life insurance peers likely warrants a discount to book value, Newsome argues, but "not necessarily as low as the current multiple suggests." Finally, valuations are attractive, with the stock trading at 52% of book value versus its property-casualty insurance peer group currently trading at an average 99% of book as well as its life insurance peer group currently trading at an average of 78%. Newsome has a $35 price target on the stock, about a 20% upside from current levels, but still only a 58% multiple to its one-year forward book value of $60.83. Earlier this month, Goldman Sachs upgraded the stock to a buy with a price target of $40, citing an improvement in its casualty insurance business, improving risk profile and higher capital deployment. Bernstein analyst Josh Stirling has also been bullish on the stock, arguing that the reducing overhang from the government stake will allow investors to increasingly focus on the fundamentals, which have been improving. --Written by Shanthi Bharatwaj in New York
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