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We have upgraded life and property insurer – American International Group Inc. (AIG - Analyst Report) to Outperform based on its improving operating and financial leverage, gaining scope for long-term growth.

Why the Upgrade?

AIG has witnessed modest upsides in its earnings estimates following its second-quarter 2013 results released on Aug 1. Both earnings per share (EPS) and total revenues of $1.12 and $17.32 billion beat the Zacks Consensus Estimate by 31.8% and 38.4%, respectively. Moreover, both the top- and bottom line exceeded the year-ago results by 6.7% and 16.7%, respectively.

Improved operating earnings across both life and property-casualty segments were led by lower claims and expenses as well as higher assets under management (AUM). These factors also drove the book value per share, combined ratio, return on equity (ROE) and operating cash flow.

Following the release of the second-quarter results, the Zacks Consensus Estimate for 2013 rose 5.2% to $4.27 per share in the last 60 days. Moreover, the Most Accurate Estimate for AIG’s 2013 earnings stands at $4.34 a share, resulting in a positive Earnings ESP of 1.6%.

Further, the earnings estimate for 2014 is pegged at $4.22 per share, up 1.4% for the similar period. With the Zacks Consensus Estimate for both 2013 and 2014 rising steadily, the company now has a Zacks Rank #2 (Buy).

We hold a strong positive bias on the company, with reasons that justify the bias. AIG has come a long way by fully repaying the government loan and streamlining its core insurance operations. The efforts are also visible in the improved financials in the past few quarters. Consistently improving operating leverage and debt reduction has also supported AIG to approve another share buyback program and initiate dividend payouts. These factors score well with the ratings agencies and investors as well.

With consistently higher operating performance in the first half of 2013, we expect the company to benefit from its scale of operations, pricing improvements and disciplined expense management in 2013, along with a positive recovery in the economy.

Other Financial Stocks That Warrant a Look

Along with AIG, other outperformers of the financial sector such as Assurant Inc. (AIZ - Analyst Report), Hartford Financial Services (HIG - Analyst Report) and ING US Inc. (VOYA - Snapshot Report), carry a Zacks Rank #2 (Buy) and also appear impressive.

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