AIG price target has been lowered by Goldman Sachs Equity Research from $44 to $43 per share, due to regulatory headwinds which could cause near-term pressure for the shares of the company. The price target is based on a weighted average of a top-down valuation and sum-of-the-parts. The main driver of the decline is lower applied ROEs in the top down methodologies.
Despite the reduction in valuation, analysts at Goldman Sachs Group, Inc. (NYSE:GS) reiterated their “buy” rating for the shares of American International Group, Inc. (NYSE:AIG), as they continue to observe considerable value in the stock.
Analysts identified some key risks in the insurance giant to be the deteriorating profitability of its P&C business or a general lack of improvement in underwriting profits, regulatory pressures that make capital deployment difficult, pressures from rating agency, and credit and interest rate volatility.
According to the analysts, investors should focus less on near-term capital deployment, given pending regulatory oversight; instead, they should pay more attention to the underlying fundamental improvements particularly the US commercial P&C business of the insurance giant.
The analysts projected that American International Group, Inc. (NYSE:AIG) will realize value creation, and its stock value will surge once the regulatory headwinds subside.
In their research note, the analysts explained the reduction of price target for AIG is based in a weighted average of a top-down valuation and sum of the parts. According to them, the primary drivers of the decline are lower applied ROEs in the top down methodologies.
In addition, the research firm also lowered AIG’s 4Q 2012 EPS by $0.01 to -$0.27/$3.67, due to the assumption that an outstanding hybrid debt issue ($1.1 billion of AIG’s 7.7% coupon debt) would be called in 1Q13 rather than 4Q12.
Last December, AIG revealed its plan to sell its airplane leasing business, ILFC, to a consortium of Chinese investors for approximately $4.8 billion. The insurance giant expects to close the transaction during the second quarter of 2013, subject to regulatory approval.
Goldman Sachs Equity Research estimates that the current book value of ILFC is $7.8 billion. The research firm cited American International Group, Inc. (NYSE:AIG) will “likely to absorb $2.5 billion charge” from the sale of ILFC at a discount to its book value.
The analysts now assume that some of the value that AIG received from its stake in AIA Group shares will be encumbered for some period of time. AIG stated that only $2.5bn would be deployable following a sale of its remaining AIA stake. Based on their interpretation of AIG’s disclosures, we assume $2.5bn of the proceeds from AIA are reflected in holding company liquidity and the remaining $4bn is held within the Direct Investment Book (DIB).