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Atlantic Equities downgrades AIG on reserve uncertainty, growth plans

Atlantic Equities analysts John Heagerty and Nadja Heini have downgraded American International Group Inc. to "neutral," noting that the insurer's reserving issues have persisted and saying that resuming a strategy of growth could be expensive.

The analysts wrote that the company's strategy of returning capital to shareholders through buybacks has largely been successful. Its new plan for capital, to invest in organic growth, is a "sensible long term strategy." However, they also believe the plan will likely take several years to create returns for investors.

The possibility for AIG to engage in M&A activity to grow also presents risks, they wrote, as insurer valuations are currently high and AIG would need to pursue "sizable" targets for deals to have a meaningful impact on earnings.

AIG's reserve development issues have followed it into the current year after a huge $5.6 billion reserve charge in the fourth quarter of 2016. The reserve strengthening of $341 million in the second quarter, while small, was "problematic and served to highlight that this will be an ongoing issue," the analysts wrote.

Heagerty and Heini maintained their price target for the stock at $70. They raised their 2017 EPS estimate for the company by 6% to $5.47, but lowered their 2018 EPS estimate to $5.54.