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The Goldman Sachs Group, a global investment banking and securities firm, is bullish on American International Group Inc.
In a new equity research report released Wednesday, Goldman Sachs upgraded the AIG stock to “Buy” from “Neutral,” and raised its 12-month price target to $40 from $31. (Currently it’s trading at around $32.)
“We are upgrading AIG to ‘Buy’ as we believe now is the right time for investors to build a position, given early signs of progress at Chartis and unexpected rapid deployment,” according to Goldman Sachs analysts Michael Nannizzi and Eric Fraser who prepared the report.
Much has changed in the past year, according to Goldman Sachs. “A year ago the Treasury (and AIG) each sold shares at $29 on the promise of amorphous potential on top of a complicated base. Since then, AIG has taken significant steps to clean up a complicated profile while using cash from noncore asset sales to buy back $5 billion in stock, facilitating a reduction in the Treasury stake from 90 percent to 60 percent — all well ahead of schedule.”
The analysts wrote that the continuing stock sales by the U.S. Treasury could hinder the stock price in the near term but added that the longer-term prospects look brighter. “Near term, we expect non-core asset sales to continue to support buybacks, and longer term, for investors that can outlast the Treasury, we believe progress at Chartis will provide further upside. Our 12-month price target rises to $40.”
The analysts said that while the first-quarter profitability at Chartis, AIG’s property/casualty division, was “below expectations,” the commitment to fixing Chartis was particularly clear.
“Premiums fell 4 percent across Chartis overall and 10 percent within Chartis Commercial,” analysts wrote. “Although changes in disclosure make historical comparisons difficult, it seems safe to say that there have been few occasions historically when AIG shrunk any of its businesses on a year-over-year basis, especially by such a large amount. Changes are taking place at Chartis that we think will yield improved results in future periods…We believe AIG is showing early signs of progress in improving the underwriting profile of its book of business.”
Additionally, a better overall pricing environment provides a backdrop that is also conducive to improving returns at Chartis, analysts noted. “And we continue to hear from the marketplace that AIG is taking a very disciplined approach to pricing. We expect that actions to improve profitability long term are not likely to manifest in earnings immediately (and in fact could create some expense-driven profitability pressure), but we think a continuation of the early actions we saw in Q1 are a positive development.”
The report also forecasts that AIG will benefit from an improving pricing environment for its P/C insurance products as well as the disposition of non-core assets.
“As the company sheds high-risk (and capital intensive) non-core assets, AIG’s risk profile should improve while also providing the company with additional capital—both directly and indirectly—that it can use to buy back shares from the Treasury at a discount to prevailing book value,” according to the report.