American International Group Inc (NYSE:AIG) has certainly had its share of ups and downs, but Bernstein analysts think the company is on the road to recovery. In a report dated April 21, 2014, analysts Josh Stirling and Grant D’Avino highlighted their conference call about AIG and explained away the concerns bears have about the company.

AIG
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Key points about American International Group

They started by explaining three important points they believe investors should understand about American International Group Inc (NYSE:AIG). First, they note that the insurance provider is becoming too big to ignore. As a result, they think more and more investors are going to see AIG as a company they must have in their portfolio. They say it’s an “under-owned mega cap” that will continue recovering its margins, raising its dividend and buying back stock.

Second, their ideas about American International Group Inc (NYSE:AIG) go beyond recovery. They think AIG will again be seen as a great company and go on to trade at a premium compared to peers. The analysts note that AIG still has a massive footprint in emerging markets, even after divesting several parts of itself. In addition, the company benefits as rates rise and they believe it has “cyclically attractive opportunities to deploy excess capital to grow in U.S. life and mortgage insurance.”

And third, the Bernstein team calls American International Group Inc (NYSE:AIG)’s recovery “inevitable” but note that guessing the timing is difficult. However, they think this year is the one when the numbers will begin to look good. They say Wall Street mostly seems to be expecting “a couple of noisy quarters” and hasn’t priced in AIG’s improvement yet. They believe sell-side estimates will keep rising and say consensus estimates remain 15% below their 2015 estimates.

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AIG needs progress on loss ratios, margins

One of the objections they hear to buying American International Group Inc (NYSE:AIG) is that the company isn’t progressing on its loss ratios. However, Bernstein analysts say they see an operating recovery, while Wall Street doesn’t. There’s 9-point difference between their loss ratio estimate and Wall Street’s estimate.

They note that so far, P&C results have been volatile, so the trajectory is unclear. American International Group Inc (NYSE:AIG)’s recent quarters have been disappointing, but the Bernstein team sees improvements in the Commercial segment which is the most difficult part of it to fix, they say.

In terms of margins, others say American International Group Inc (NYSE:AIG)’s pricing momentum is slowing down, which will keep the company from improving margins. However, the Bernstein analysts say Wall Street is missing out on how important it is to fix claims. They think the company is changing the way claims are managed but that the results aren’t yet showing the progress AIG has made so far.

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AIG must be rational, deals with weak property pricing

They say the third objection they often hear is that American International Group Inc (NYSE:AIG) was irrational, “too competitive,” reduced pricing too much, didn’t use any data and were completely disorganized. In fact, some say the company was basically competing with itself because of how unorganized it was. However, they point to what competitors say about the company. Specifically, they point to something Chubb recently said, which was basically that a large, overly competitive company once spoiled the workers’ compensation market but that now the market is good enough to write in.

The Bernstein team also notes that people say property pricing is weak right now, but if that’s so, they question why American International Group Inc (NYSE:AIG) is actually growing. They say the company is especially growing in large accounts and large property.

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The old versus the new AIG

The analysts believe the old American International Group Inc (NYSE:AIG) was playing like a small cap name, trying to grow without taking any risk. However, they believe the company is now playing like Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B), which is quite a bold statement. They say the insurance provider is “playing like a big gorilla” and in a “really economically smart way.”

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