Why Deutsche Bank Upgraded AIG

Deustche Bank’s Joshua Shanker and Phil Stefano upgraded shares of American International Group (AIG) today and it had little to do with improving business, stronger margins or any change in fundamentals, really.

EPA

Nope, their American International Group upgrade is based on one factor and one factor only: Valuation. They explain:

We believe that there are a number of headwinds associated with American International Group: a bloated expense structure that has defied investor expectation for decline, a high reliance on positive capital markets trends in its earnings, a high profile trial alleging that the company did not act in shareholder interest when it accepted a government bailout, etc. This list seems like it acts as a reason not to own American International Group stock. However, these issues have reduced American International Group's share price to a level where it seems attractive to buy it.

It is easy to point to the problems that underlie American International Group's operations…However, what is difficult to refute is that while American International Group has been earnings a normalized ROE of around 6-7% for the past year, it has grown book value per share by 15-16%. The financial engineering at the company currently makes up for the shortcomings in its operational performance. We believe that has been true for the last three years, and will continue to be true for the foreseeable future. If American International Group can resolve some of its operational issues, all the better. Our view of the company has not changed. Merely the stock has retraced to where we feel comfortable recommending that investors put new money to work in the name.

Shanker and Stefano also note that American International Group isn’t the only insurance stock getting pounded recently, as Ameriprise Financial (AMP), MetLife (MET) and Prudential Financial (PRU) have also been dumped by investors recently. They explain why:

Ameriprise, MetLife and Prudential have all underperformed AIG, likely due to the life insurance focus they share with AIG. The significant exposure to ten-year interest rates markets may go far to explaining its month-long underperformance, given that property & casualty insurers are only down in the low-single digits, during this market sell-off.

Shares of American International Group have gained 0.5% to $51.04, while Ameriprise Financial has risen 0.9% to $113.30, MetLife has advanced 0.5% to $49.11 and Prudential Financial has dipped 0.3% to $80.86.