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Upbeat on AIG, Sterne Agee Analysts Assign the Insurer a "Buy" Rating

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A New York-based securities firm today initiated coverage of American International Group, New York, with a buy rating based on its view that its major problems are behind it, and there is a potential for strong growth in core operations, such as Chartis.

“While we view AIG as an event-driven stock in the near term, we view it as a return-on-investment improvement/free cash flow story longer-term,” say analysts at Sterne Agee in New York.

One of the reasons for Sterne Agee’s optimism about AIG’s prospects: the insurer’s interest rate risk is “more muted” than that of its competitors. Sterne Agee analysts John M. Nadel, Dan Farrell, Alex Levine and Nitin Chhabra justify their upbeat view on the fact that core assets that have had recent problems should show strong growth.

“While non-core asset dispositions and capital management as well as continued reduction in the U.S. Government’s stake will likely remain the near-term focus of investors, we believe the longer-term valuation potential will be far more correlated to the pace of fundamental improvement in ongoing operations, particularly Chartis,” the analysts say.

Sterne Agee put a target price for AIG at $39. The stock is currently selling at about $30.50, which is high enough for the U.S. to sell its controlling shares at a profit for the taxpayer, according to the latest analysis by the Government Accountability Office.

The analysis of strong growth potential is partly based on the value of AIG’s operating loss carry-forwards. The analysis projects the potential net present value of AIG’s loss carry-forward to a conservative project of $11.5 billion, or $8.28 a share.

The analysts also base their optimism for the company, which the government bailed out in September 2008, on their belief that the government will sell its stake in the business “faster than many expect.” The analysts believe that as the government gradually sells its majority stake in AIG, the company’s index weightings will rise.

The analysts also believe that the reserve position of Chartis is “better than most perceive.” The analysts additionally suggest that return-on-equity improvement “stories” in insurance stocks “typically work;” and that AIG’s free cash flow is “likely to be meaningful.”

The analysts caution that key investment risks include the fact that removal of the government overhang is “heavily capital markets-dependent,” that is, that investors will see the stock as attractive.

They also warn that volatility in AIG’s earnings will likely continue, and that AIG is susceptible to a spike in long-term interest rates. The analysts also caution that it is unclear what a systemically-significant designation for AIG by the federal government will “ultimately mean for AIG,” and that a successor to current CEO Robert Benmosche is “unclear, though not a near-term concern.”


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