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AIG Will Sink or Swim Without Uncle Sam (Update 2)

Then again, Shanker -- who rates AIG a "Buy," with a $41 price target -- offered a contrarian argument, saying that the loss estimate "could also mean that AIG has a gross loss substantially higher, which likely would lead investors to be concerned about aggregation risk is its underwriting."

Even before Sandy's visit, there were signs that AIG's P&C underwriting improvement was trailing its major competitors. For the first three quarters of 2012, the company reported an underwriting loss of $838 million for its Property Casualty unit, improving from an underwriting loss of $2.494 billion during the first three quarters of 2011. The P&C combined ratio -- incurred losses plus expenses, divided by earned premiums -- was 103.2 during the first three quarters, improving from 109.3 a year earlier.

A combined ratio of over 100 indicates an underwriting loss. Here's a comparison with P&C underwriting results for some of AIG's competitors:
  • Allstate (ALL - Get Report) on Nov. 28 estimated that its losses for October, net of reinsurance, totaled $1.1 billion, before taxes. The company said that "autos represent approximately 40% of the total gross losses, with 78% in New York, 19% in New Jersey and 3% in other states." For its Property-Liability unit, Allstate reported underwriting income of $1.316 billion for the first three quarters of 2012, improving from an underwriting loss of $1.483 billion, a year earlier. The combined ratio improved to 93.4 during the first three quarters, from 107.7 during the same period in 2011.
  • The Travelers Companies (TRV - Get Report) on Dec. 5 announced that its preliminary estimate of losses related to Sandy was $1.135 billion, net of reinsurance. The after-tax loss estimate was $650 million. For the first three quarters, Travelers reported an underwriting profit of $845 million for the first three quarters of 2012, improving from an underwriting loss of $1.453 during the first three quarters of 2011. The company's combined ratio for the first three quarters was 94.3, improving from 108.2 a year earlier.
  • Chubb Corp.(CB) hasn't yet reported an estimate of losses from Hurricane Sandy, but the company did say in its 10-Q filing on Nov. 8 that it had "temporarily ceased" repurchasing common shares. For the first three quarters of 2012, Chubb reported underwriting income of $880 million, increasing from $290 million during the first three quarters of 2011. The combined ratio for the first three quarters was 90.1, improving from 97.1 a year earlier.

Weiss Ratings senior analyst Gavin Magor says that "AIG is still seen to be unreasonably competitive in the market. They have been accused in the past of buying the market and using the government support essentially to do that."

"More recently, they have started to be the one group that is growing in the mortgage guarantee market," Magor says, "so they are taking advantage of the opportunity to buy profitable new mortgage guarantee paper. They are certainly well positioned for the housing market when it changes."

Sell-Side Analysts Love AIG

AIG's shares have now returned 52% year-to-date, following a 52% decline during 2011. Putting those two numbers in perspective, the shares were down 27% from the end of 2010.

The shares trade for 10 times the consensus 2013 EPS estimate of $3.49, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is four dollars.

Out of 22 analysts polled by Thomson Reuters, 14 rate American International Group a buy, while eight have neutral ratings.

Sterne Agee analyst John Nadel on Tuesday said that his firm was not surprised by the government's timing for the sale of its remaining AIG shares, as "the announcement of estimated losses from Sandy was the critical factor," in the timing of the announcement. The analyst said that with the U.S. Treasury "fully out, we expect [AIG's management] can now devote 100% of its attention to driving returns and improved financial performance."

As part of AIG's efforts to "drive improved financial performance and higher [returns on equity]," Nadel hopes to see the "initiation of a common dividend," along with details on expense initiatives and a change in management incentive programs "to further align incentives with shareholders." Nadel rates AIG a "Buy," with a price target of $40.00 and estimates the company will earn $3.20 a share in 2013, with EPS increasing to $3.75 in 2014.

Going forward, long-term investors can be reasonably certain that AIG will not repeat the mistakes that led it into the terrible credit default swap positions that nearly overwhelmed the company in 2008. The Federal Reserve will be watching over the holding company as its main regulator.

Of course, investors may be seeing some increased volatility in the company's stock price, with its single largest investor now completely out of the picture.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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