On Dec 9, we downgraded life property-casualty (P&C) insurer – American International Group Inc. (AIG) to Neutral based on its moderated growth momentum alongside a deteriorating top line. Yet, improved financial leverage and capital position is driving efficient capital deployment.
Why the Downgrade?
AIG has witnessed very minor corrections since its third-quarter 2013 results on Oct 31. Both operating earnings of 96 cents per share and total revenue of $14.83 billion topped the Zacks Consensus Estimate of 93 cents and $10.1 billion, respectively, during the quarter.
However, both earnings and revenues lagged the year-ago results by 3.0% and 11.3%, respectively. Overall, AIG delivered positive earnings surprises in all the last 4 quarters with an average beat of 102.4%.
Operating growth was driven by improved assets under management (:AUM), lower claims and higher premiums within the Life & Retirement segment. This was partially offset by lower claims and investment income in the P&C segment, although combined ratio improved due to lower expenses.
Additionally, loss of income from AIA and Maiden III led to underwriting loss and reduced bottom line. Consequently, book value per share and return on equity (:ROE) also witnessed deterioration.
Following the release of the third quarter results, the Zacks Consensus Estimate for 2013 inched up 1.6% to $4.33 per share in the last 60 days. The same for 2014 remained intact at $4.22 a share.
Meanwhile, the Most Accurate Estimate for AIG’s 2013 earnings stands at $4.39 a share, resulting in an Earnings ESP of -1.4%.
Moreover, the current estimates reflect 10.2% year-over-year growth in 2013, while a drop of 2.7% is projected in 2014. With the Zacks Consensus Estimate for both 2013 and 2014 being sticky, the company now has a Zacks Rank #3 (Hold).
AIG enjoys a strong position in its markets of operation. Fundamentals have also been benefiting from improved product pricing, claims management, diversified insurance products portfolio, risk management and a strong distribution network.
However, deteriorated investment portfolio amid intense competition and low interest rate environment increase operating and financial risks. Nonetheless, AIG’s debt reduction and effective capital deployment score well with the long-term investors.
Other Insurers That Warrant a Look
While we remain on the sidelines regarding AIG, some better-ranked insurers are Old Republic International Corp. (ORI), First American Financial Corp. (FAF) and Hallmark Financial Services Inc. (HALL). All these stockssport a Zacks Rank #1 (Strong Buy).