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Is AIG Doomed to Have a Terrible 2019 Too?

Sapna Bagaria

The stock of American International Group Inc. AIG seems to be in rough waters as the company is faced with a challenging insurance market, which has dragged down revenues in its property and casualty (P&C) business. The P&C business is under the umbrella of the General Insurance segment, which contributes nearly 59% of the company’s total revenues, this year.

Other macro factors such as low interest rates, currency exchange rates, credit and equity market conditions, and catastrophic claims events also acted as dampeners.

Notably, AIG has lost nearly $20.5 billion in market value in a year’s time. Year to date, the stock has lost 37% compared with the industry’s decline of 18.9%. In 2017, the stock lost 9%.

The company missed estimates for the past five quarters in a row, due to weak performance in its General Insurance segment, unfavorable reserve release, low investment income and loss from catastrophes.

Problems Plaguing AIG

Issues at AIG are not new. It all started at the height of the subprime crisis, when the company was bailed out (for $185 billion) by the government in order to save it from huge exposure to the subprime securities. Though the company repaid the bailout money by 2012, its operational problems continued.

AIG has incurred sizable investment and underwriting losses over the last decade. It has also seen significant changes in its operating, capital structure and senior management, causing the company to remain under significant stress during all these years.

The company has faced hurdles with respect to reserving, pricing, and handling its longer tail commercial lines business, and the effectiveness of the group’s enterprise risk management function.
AIG became a victim of its own mammoth size with numerous unrelated business under its hood that created very little or no synergy. A number of low-return-generating businesses along with a weak industry dragged down the company’s results.

AIG’s top line has suffered over the years from declining premium due to disciplined underwriting, competitive market conditions and reduction in business due to numerous divestitures taken. This is evident from declining revenues since 2010 (except in 2012) that continued till the first nine months of 2018. The company is unlikely to see any respite in the coming quarters as very a competitive property and casualty market and soft insurance pricing will keep the top line under pressure.

Another driver of its revenues, net investment income has also declined this year. Despite rising interest rates, the company’s net investment income dipped 9% in the nine months of 2018, due to less robust performance in alternative investments.

An already suffocating top line performance coupled with AIG’s exposure to catastrophe losses make matters worse. The company incurred catastrophe loss of $4.17 billion in 2017, up 213% year over year. Though catastrophe loss of $2.15 billion was down 37% in the first nine months of 2018, the company further expects to incur $750 million to $800 million of cat losses in the fourth quarter. These losses have historically imparted volatility to the company’s earnings and will be a headwind going forward.

Remedial Steps Taken

After years of asset dispositions, in order to restore profitability and consolidate business, management is now targeting new and profitable areas of expansion. In this vein, this year, it made the twin acquisitions of Glatfelter Insurance Group and Validus Holdings.

Glatfelter, the program manager and a specialty insurance broker, will expand AIG’s General Insurance business, by bringing along high-quality program underwriting capabilities. Validus has added diversified franchises to AIG including Validus Re, a reinsurance platform; AlphaCat, an insurance-linked securities asset manager; Talbot, a Lloyd’s syndicate; Western World, a specialist in U.S. small commercial excess and surplus underwriting; and Crop Risk Services, which provides access to the North American crop insurance market. This acquisition has added complementary businesses to AIG while providing an experienced team.

General Insurance continues to execute on its other strategic priorities such as improving core performance by refining the portfolio, adding highly respected industry executives to its leadership team, strengthening the underwriting organization by recruiting seasoned underwriters and continuing to build out end-to-end business units in North America and International. To this end, it expanded its European Casualty excess of loss program to cover the entire international business and entered into a new U.S. terrorism facility that reduced net exposures for its in-force commercial property policies.

Can the Stock Stage a Comeback in 2019?

Though the company has undertaken massive turnaround initiatives and has changed its leadership in hopes that the new management will bring stability, investors will remain skeptical until these actions get reflected in its financials. Till then, the stock is expected to remain under pressure.

Also, AIG has a Zacks Rank #5 (Strong Sell) that indicates a bleak scenario for 2019. Moreover, the Zacks Consensus Estimate for 2019 earnings has moved down almost 2.8% to $4.9 over the last 30 days. This reflects analysts’ pessimism over the stock.

Key Picks

FBL Financial Group, Inc. FFG, James River Group Holdings, Ltd. JRVR and MetLife, Inc. MET are better-ranked stocks in the same sector. Each of these stocks have a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

James River, MetLife and FBL Financial Group have witnessed an upward revision in 2019 earnings estimates by 1.9%, 1.5% and 0.4%, respectively, over the past 60 days.

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American International Group, Inc. (AIG) : Free Stock Analysis Report
 
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