The stock of American International Group Inc. AIG has been out of favor with investors having missed estimates for five quarters in a row due to weak performance by its General Insurance segment, unfavorable reserve release, low investment income and loss from catastrophe.
Year to date, shares of the company have lost 27%, which is more than the industry's decline of 16%.
The stock has seen the Zacks Consensus Estimate for current-year earnings being revised 15.3% downward over the last 30 days, reflecting analysts’ pessimism. Given the headwinds facing the company, we believe that its stock will remain under pressure in the coming quarters.
What Drained the Stock?
Revenues, which have been declining every year since 2013, continued the downward journey in the first nine months of 2018. The bottom line for the first nine months also remained under pressure. Lackluster results were an outcome of lower premium in the company’s Life and Retirement business and high catastrophe losses.
Also, performance of its General Insurance business has not been too impressive, though premium written has grown 2.2% in the first nine months of 2018. The segment generated underwriting loss of $2.1 billion (down 42% year over year).
The company’s nature of operations exposes it to weather-related losses. America International Group incurred catastrophe loss of $4.17 billion in 2017, up 213% year over year. Its catastrophe loss of $2.15 billion was down 37% in the first nine months of 2018, which weighed on its underwriting profitability.
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 shareholders’ funds.
Will the Stock Rebound?
Although results show that a number of growth initiatives (reinsurance deal with Validus, cost control efforts, acquisition of Glatfelter, hiring industry leaders in key positions, among others) taken in this segment by management are slowly taking off, we would wait and see the positive effect of the same in the underwriting results. Until the company is able to report positive earnings, the stock will remain under pressure.
AIG further expects to incur $300 million to $500 million of losses from Hurricane Michael in the fourth quarter, which might dent its underwriting results by increasing its claims costs.
Some better-ranked stocks in the same space are FBL Financial Group, Inc. FFG, James River Group Holdings, Ltd. JRVR and MGIC Investment Corp. MTG. Each of these carries a Zacks Rank #2 (Buy) and beat their respective earnings estimate in the third quarter. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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