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AIG Ready to Shop for Acquisitions (Update 1)

Following the earnings release late on Thursday, KBW analyst Cliff Gallant reiterated his neutral rating on AIG, but raised his price target for the shares to $34 from $31, "in recognition of AIG's increase in book value during 2012." The company's book value per common share was $68.87 as of Sept. 30, increasing from $42.60 a year earlier.

Gallant said that "while EPS were better than expected, the strength was in the non-core Other segment, while the ongoing insurance and aircraft leasing businesses were less profitable than expected." For the Property Casualty unit, earnings came in below Gallant's $957 million estimate, and the analyst said that the property and casualty combined ratio was "disappointing given the strong results reported by peers for 3Q12."

For Allstate (ALL - Get Report), the third-quarter P&C combined ratio improved to 90.2 from 104.8 in the third quarter of 2011, while the third-quarter underwriting profit was$659 million, compared to an underwriting loss of $309 million a year earlier.

For Travelers Group (TRV - Get Report), there was similar improvement, with the third-quarter combined ratio declining to 90.3% from 104.5% in the third quarter of 2011, and a third-quarter underwriting gain of $514 million, compared to an underwriting loss of $289 million a year earlier.

Gallant cut his 2013 earnings estimate for AIG by a nickel to $4.50 a share, factoring-in a "a rough initial estimate of Sandy losses of $400m, based upon market share data," while keeping his 2013 EPS estimate at $3.45.

The analyst said that "while AIG has executed a remarkable turnaround since 2008, we view that the next step of improving long-term ROE will be a difficult challenge. Given our concerns around ROE and also the quality of reserves, we remain cautious."

Bank of America Merrill Lynch analyst Jay Cohen rates AIG a "Buy," with a price objective of $44, and on Friday raised his 2012 EPS estimate to $4.65 $4.40, "due to the upside surprise in the 3Q," while lowering his 2013 EPS estimate by a dime to $3.60, in part because of an increase in estimate expenses.

Cohen said that "the P/C business did make progress in improving its underlying loss ratio, but the reported results missed our forecast partly due to $145 million of net adverse reserve development, a disappointing drag, but one that seems to represent relatively modest adjustments to AIG's reserves rather than a signal of a larger problem."
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