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AIG's Business Rejig to Boost Core Assets, Revenue Dip a Woe

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  • AIG-WS

American International Group Inc. AIG, which provides the property casualty insurance, life insurance, retirement products and other financial services to customers in more than 80 countries, has been busy streamlining its business over the past many years and recently sold its run-off operation, Fortitude Re.

We believe that by selling Fortitude Re, AIG will get rid of its legacy liability pertaining to the insurance portfolio, which includes run-off management solutions for long-dated, complex risk policies. These were non-core operations for AIG with lower return and high-risk characteristics, which could potentially hamper the company’s performance going forward. Reduction in legacy liability will also improve the company’s risk-adjusted capital ratio.

Over the years, AIG has been simplifying its core insurance activities and restructuring businesses by discontinuing certain operations, which in turn, enhanced its capital allocation exercise and operating leverage. Since 2008, the company has executed more than 50 asset sales and divestitures, resulting in proceeds worth above $100 billion. These divestments were intended to generate proceeds for repaying the bailout funds to the U.S. government, rationalize the company’s portfolio, which had a host of operations with low prospects, creating limited synergistic benefits, concentrate on core operations to yield higher return on equity and utilize funds for share buybacks.

Apart from dropping non-core operations from its primary agenda, the company is seeking to build its business through growth-by-acquisition policy. It already bought Ellipse, a specialist provider of group life risk protection in the UK, from Munich Re. The transaction strengthened AIG’s position in Life & Retirement businesses. Besides, the buyouts of Validus Holdings, Ltd. and Glatfelter Insurance Group fortified the company’s global General Insurance business.

Notably, CEO Brian Duperreault made a significant shift in the company’s capital deployment, expecting to utilize the funds for possible purchases in the international markets. This, in turn, will boost the company’s personal and life lines segments as well as propel investments in the domestic middle market, much opposed to its hitherto management of capital resources for share repurchases. This strategy bodes well for the long haul as business expansion looks promising.

However, we believe, the top line will be stressed once again (revenues down 15.3% in the first quarter of 2020) due to COVID-19-induced uncertainty in the business and economic environment.  The company also withdrew its previously-issued guidance including the one related to adjusted return on equity.

Also, low interest rate landscape will dent net investment income.

In three months’ time, the stock has surged 56.7% compared with the industry’s growth of 35.2%.

AIG currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space are CNO Financial Group Inc. CNO, MGIC Investment Corp. MTG and EverQuote Inc. EVER, each presently carrying a Zacks Rank #2 (Buy). Earnings of all three players surpassed estimates in the last reported quarter by 45%, 10.53% and 16.67%, respectively.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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