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AIG to Incur Catastrophe Loss: Will the Stock Sink Further?

American International Group Inc. AIG anticipates incurring catastrophe loss of $750 million to $800 million for the fourth quarter. This includes weather-related loss incurred during October and November.

This loss will be incurred in the company’s General Insurance segment, which contributed nearly 65% of its adjusted revenues in the first nine months of 2018. This weather-related loss will likely weigh on the company’s profitability, which posted losses in 2016 and 2017.

Other companies in the insurance space — including The Allstate Corp. ALL, The Hartford Financial Services Group, Inc. HIG  and Chubb Limited CB — also estimate to incur weather-related losses.

While Allstate expects to incur catastrophe loss of $202 million pre-tax ($160 million after tax) for October, Hartford Financial anticipates incurring $365 million. Further, Chubb is likely to face nearly $195 million of after-tax catastrophe loss in the fourth quarter.

AIG’s nature of operations exposes it to weather-related losses. It incurred catastrophe loss of $4.17 billion in 2017, up 213% year over year. Its catastrophe loss of $2.15 billion for the first nine months of 2018, though 37% narrower than the year-ago period, weighed on its underwriting profitability.

AIG, however, expects to report slight underwriting profit for 2018. We believe that management will be able to achieve the same, given that the company reported adjusted pretax income of $2.1 billion in the first nine months of 2018, though down 10.4% year over year.

The stock of AIG has been out of investors’ favor, having missed estimates for past five quarters due to weak performance in its General insurance segment, unfavorable reserve release, low investment income and catastrophe losses.

The company’s return on equity of 3.44% is low compared with its industry average of 8.1%. This reflects the company’s relative inefficiency in using shareholder’s funds.

In a year’s time, shares of the company have lost 32%, which is more than the industry's decline of 17%.


The Zacks Consensus Estimate for current-year earnings for the stock was revised 15.3% downward over the last 30 days, reflecting analysts’ pessimism. Given the headwinds that the company is facing, we believe that its stock will remain under pressure in the coming quarters.

For 2019, we do not expect any significant improvement in AIG’s results since the company indicated that General Insurance’s net earned premium will be consistent with 2017 levels. The company also indicated that earnings for its Life and Retirement segment will decrease for the second half of 2019, partly due to investment in new business and growth initiatives. The company’s share price will continue to remain under pressure until it manages to achieve sustainable profitability.

AIG currently carries a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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