American International Group, Inc. AIG is in troubled waters, owing to challenges in the property and casualty markets that have dented revenues in one of its most important business — the General Insurance.
Other macro factors such as low interest rates, currency exchange rates, credit and equity market conditions as well as catastrophic events have also acted as dampeners.
These factors have hurt the company’s price performance. In 2018, the stock tanked by 34% compared with its industry’s decline of 6%.
Though the stock has staged some recovery with a gain of 14% so far this year, compared with the industry’s gain of 6%, it still pales in comparison with other companies in the same space such as Prudential financial Inc. PRU, The Progressive Corporation PGR gain of 21%,19%, respectively.
Certain factors nagging the company continue to exist. Thus, considering the headwinds, we believe that the stock will be under pressure in the upcoming quarters.
Factors Hurting the Stock
Top line Under Pressure: The company’s revenues have suffered over the years from declining premium due to disciplined underwriting, competitive market conditions and reduction in business stemming from numerous divestitures. This is evident from 2013 to 2018. Challenges in the property and casualty market as well as continued business dispositions will keep the top line under pressure.
Weakness in General Insurance Segment: This segment has reported a decline in premium written since 2016. Though the same witnessed a reversal in 2018 with premium written up by 4%, the profitability of the segment, as measured by underwriting income, amounted to a loss of $3.1 billion (down from underwriting loss of $4.5 billion in 2017). Notably, the results show that a number of growth initiatives (reinsurance deal with Validus, cost control efforts, acquisition of Glatfelter, hiring industry leaders in key positions and others) undertaken are beginning to yield, the positive effect of the same in the underwriting results are still awaited.
Low Net Investment Income: In 2018, the company’s net investment income declined due to lower returns, primarily caused by lower hedge fund performance and decline in income from fixed maturity securities. In 2019, we expect net investment to be under pressure due to dovish stance of Fed, which is unlikely to see any interest rate hike in the same year. This will keep investment yields at low levels and constrain net investment income.
High Debt Level: The company’s debt is rising consistently since 2015. Its debt to equity ratio of 60% is higher than the industry’s average of 32%. Moreover, times interest earned ratio has declined to 1.2 from 2.3 in 2017. A fall in the same signifies reduced ability to serve on interest payments.
Decline in Profitability: The most important measure of a company’s profitability, ROE, has declined to 2.1% in 2018 from 4.1% in 2017. This is lower compared with the industry’s ROE of 8.1%, which also signifies the company’s operating inefficiency.
American International carries a Zacks Rank #5 (Strong Sell). The stock carries an Earnings ESP of -9.93%. We caution against stocks with a Zacks Ranks #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.
A better ranked stock in the same space is Argo Group International Holdings, Inc. ARGO, with a Zacks Rank #2 (Buy). The stock has surpassed earnings estimates in each of the four quarters with an average positive surprise of 225.1%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Prudential Financial, Inc. (PRU) : Free Stock Analysis Report
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