Shares of American International Group Inc. jumped Monday after a Banc of America Securities analyst upgraded the stock to "Buy," forecasting a recovery in the stock price if its new chief executive is successful reducing debt and focusing on the insurance business.
Shares gained $1.46, or 5.8 percent, to end at $26.53. Shares are down about 62 percent from a 52-week high of $70.13 in October.
In June, AIG named former Citigroup Inc. executive Robert Willumstad to replace Martin Sullivan as its CEO. If management proves willing to make substantial changes and is able to execute a long "to-do" list, analyst Alain Karaoglan expects the market to regain some confidence in the company.
Karaoglan upgraded the New York-based insurer's stock to "Buy" from "Neutral," and cut his target price on the shares to $35 from $43.
Karaoglan's "to-do" list calls for Willumstad to, among other things, review the insurance businesses, untangle inter-company relationships, improve the accounting philosophy and raise capital if needed.
"For the first time, there is a will for real change, with now an outsider as CEO and most board members having joined over the past three years," wrote Karaoglan. "They are, in our view, free from the shackles of what AIG was and can think of what AIG should be."
Despite raising $20 billion in fresh capital in May, AIG still faces huge problems stemming from its exposure to mortgages and other types of debt.
The challenge for Willumstad, Karaoglan said, is to de-leverage the company and to focus on its core strengths as an insurance business, rather than a financial services firm. In addition to its insurance operations, AIG's segments include asset management and the company also offers retirement products.
"If he is successful, the AIG stock could offer tremendous returns well beyond our target price over time," he said.
Citi Investment Research analyst Joshua Shanker said recent pessimism is overdone, and that favorable quarterly earnings numbers at several financial institutions suggest credit concerns may be "overblown."
"Property and casualty stocks have been oversold as part of the broader financials sell off, in our view, despite their relatively modest housing and credit related exposures," Shanker wrote in a note to clients. "We do not find that the deteriorating underwriting fundamentals, which may lead to break-even or modest underwriting losses in 2008 barring major catastrophe losses, justify current valuations."
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