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AIG's Benmosche Frustrated by Analysts' Negative Research

Source: WSJ - Serena Ng

Posted on 26 Aug 2011

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After helping to underwrite American International Group Inc.'s (AIG)  May stock sale, several large Wall Street bank analysts did something rare: publish biting research reports about the insurer. Now, AIG's CEO, Robert Benmosche, is biting back.

Mr. Benmosche has complained to senior executives at investment banks about the unfavorable stock research, suggesting that some analysts don't fully understand the company and its value, according to people familiar with the matter.

It is more than an academic argument: AIG is considering which four banks should lead another large offering of the U.S. government's shares later this year—and Mr. Benmosche has told The Wall Street Journal he intends to change at least one of four lead underwriters following his dissatisfaction with how the last deal went. The choice would be a plum for those keeping their roles on the coveted assignment and a black eye for whichever bank is replaced.

An AIG spokesman declined to comment.

The predicament underscores the continuing pressure on Wall Street banks to publish rosy research on clients that pay them to underwrite stock offerings or advise on merger deals. For years, bankers lost out on lucrative deals and research analysts risked losing access to corporate executives if they issued negative stock recommendations. That led to a 2003 pact in which 10 top securities firms paid a total of $1.4 billion to settle—without admitting or denying—regulatory allegations that they issued overly optimistic research on clients to win business.

Mr. Benmosche has told bankers that his decision on selecting underwriters for AIG's coming stock offering won't be based simply on the relationships they have with AIG executives and will take into account a number of factors, according to a person familiar with the matter. They include stock research, investment bankers' understanding of the company and an analysis of which buyers in AIG's May offering ended up holding the shares and which ones "flipped," or quickly sold, them after the deal, the person said.

Though Mr. Benmosche expressed frustrations about the recent stock offering and said he wants banks to portray AIG accurately, he didn't demand that they publish positive research, the person said.

Mr. Benmosche's message comes as bankers and senior executives from multiple firms have reached out to AIG, hoping to persuade its management that they should be on the next deal and offering ideas and additional services. The U.S. Treasury is still hoping to recoup $41.7 billion from selling its 77% stake, which currently has a market value of $33.5 billion.
The issue is sensitive. Mr. Benmosche can't be seen directly demanding that his firm receive positive research from Wall Street; that could flout the spirit of regulatory rules. And under the 2003 settlement, financial firms are barred from altering their research ratings in a bid to win business. At the same time, the better AIG does, the more U.S. taxpayers will recover from the government's 2008 bailout of the company.
Spokesmen for the Treasury and SEC declined to comment.

In AIG's case, 10 of the 15 analysts with stock recommendations on the insurer have "neutral" or "hold" calls. They include analysts from Goldman Sachs Group Inc. and J.P. Morgan Chase & Co., two of the four lead underwriters on the insurer's May stock offering, and five other banks that also helped distribute the shares.

So far, the bears have been right: AIG shares since the May offering have slid 21%, compared with a 12% decline in the stock market and 23% for a basket of insurance stocks.
AIG closed at $23 a share on Thursday, roughly half of the company's book value—or assets minus liabilities—per share.

In a June interview with the Journal, Mr. Benmosche said most of the banks leading the last public offering didn't fully "understand" AIG.
Broadly, analysts rarely place a "sell" rating on company that is a client of their securities firm. For U.S. insurance stocks, 96% of research reports now have positive or neutral recommendations, whether they are investment-banking clients or not, according to data compiled by research firm Capital IQ.

In AIG's case, some of the research reports expressed skepticism about the company's ability to meet various profitability and cost-cutting goals that its executives mapped out to investors in May. Analysts at Deutsche Bank AG and Bank of America Corp.'s Bank of America Merrill Lynch—which rounded out the quartet of lead underwriters on the offering—issued "buy" recommendations on AIG's stock a few weeks after the stock sale.

On Wall Street, some investors read "neutral" recommendations as a reason to avoid a stock. Goldman analyst Michael Nannizzi, for instance, wrote in a June report that until AIG shows progress toward its financial goals, "we would rather focus on insurers that are currently generating better returns."

J.P. Morgan analyst Jimmy Bhullar, who has a "neutral" rating on AIG and a $32 price target, said in a report that he expects AIG to fall short of its 2015 profitability target, adding that the insurer's returns "are likely to remain well below peer levels for the foreseeable future."

Earlier this month, after AIG reported second-quarter results, Goldman's Mr. Nannizzi lowered his earnings outlook for the company. He subsequently cut his stock-price target to $27 from $31, along with reductions for other insurers after their shares plunged amid a broader market rout.

AIG executives haven't spoken directly to Messrs. Nannizzi and Bhullar about their stock recommendations and financial forecasts, and neither have bankers at their firms, according to people familiar with the matter.

Spokeswomen for J.P. Morgan and Goldman Sachs declined to comment on the matter but said their firms follow strict policies regarding analysts' independence, as prescribed by the global research settlement.

The U.S. Treasury still owns 77% of AIG and effectively paid $28.73 a share for its AIG stake, or $41.7 billion for what it still holds. Mr. Benmosche repeatedly has told bankers and investors that the company won't sell the Treasury's shares cheaply and needs to earn a profit on the sales for U.S. taxpayers.

In the June interview with the Journal, Mr. Benmosche expressed frustrations with the performance of banks that managed AIG's last share sale. The May offering had to be cut back due to lackluster investor demand and raised $8.7 billion at $29 a share, a price slightly above what the U.S. Treasury paid but below what Mr. Benmosche was hoping for.

In the interview, Mr. Benmosche said that for the next offering of the government's shares, he wants to see from the banks "a clear understanding of who AIG is and our trajectory, and why AIG is a stock that investors should own."

"If I'm confident they can articulate that well, they will have a chance" at being selected as one of the four global coordinators for the next deal, he said at the time.The next offering could be take place in November, but the timing will depend on the market price of AIG's stock and investors' appetite for it at the time. Lead underwriters will be picked as the sale nears.