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Recently, we reiterated our recommendation on American International Group Inc. (AIG - Analyst Report) at Neutral based on its steady operating growth and financial sturdiness. However, intense competition and regulatory challenges simultaneously raise caution.

Why the Retention?

Estimates for AIG have remained steady since the company reported its second-quarter 2013 results on Aug 1. The company’s earnings per share of $1.12 and revenues of $17.32 billion exceeded the Zacks Consensus Estimate by 31.8% and 38.4%, respectively.

Moreover, both the top- and bottom line surpassed the year-ago results by 16.7% and 6.7%, respectively, based on improved underwriting results, premiums and deposits. Lower-than-expected claims, acquisitions and operating expenses also improved the combined ratio, cash flow book value and ROE.

Following the release of the second-quarter results, the Zacks Consensus Estimate for 2013 climbed 9.9% to $4.20 per share in the last 60 days. Additionally, the Zacks Consensus Estimate for 2014 rose 3.4% to $4.21 a share. With the Zacks Consensus Estimate for both 2013 and 2014 reflecting slight upward pressure on the stock in the near term, AIG now has a Zacks Rank #2 (Buy).

Moreover, the Most Accurate Estimate for AIG’s 2013 earnings stands at $4.28 a share, resulting in an Earnings ESP of 1.9%.

AIG’s core operations are benefiting from high value business mix as well as enhanced risk selection and pricing initiatives. A significant surge in individual variable annuities and retail mutual funds has also been witnessed on the back of effective spread management.

Although intense competition as well as volatility in interest rates and currency pose near-term financial and operating risks, AIG’s consistent focus on debt reduction, business de-risking and improved capital position score well with the ratings agencies. Moreover, the resumption of dividends and a new share buyback program reflect stable liquidity and a risk-free balance sheet, overall boosting investor confidence.

Other Financial Stocks That Warrant a Look

Along with AIG, other stocks in the insurance sector that are outperforming include Prudential Financial Inc. (PRU - Analyst Report), Cigna Corp. (CI - Analyst Report) and Loews Corp. (L - Analyst Report). All these stocks carry a Zacks Rank #2 (Buy).

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