The stock of American International Group Inc. AIG fell out of favor with investors, mainly due to its weak General Insurance segment, high debt level and catastrophe loss. Moreover, the company has witnessed its 2019 and 2020 estimates move 0.4% and 0.2% south, respectively, over the past seven days.
The company’s earnings missed estimates in two of the last four quarters, the average negative surprise being -51.90%. Given the headwinds plaguing the company, we believe that its stock will remain under pressure in the coming quarters.
Shares of this Zacks Rank #4 (Sell) company have lost 6.5% in the past six months against its industry’s growth of 0.2% and the S&P 500 Index’s gain of 9.2%. In 2018, the company lost 33.9%, higher than its industry’s decline of 16%.
Why is the Stock Down?
American International Group’s revenues have been declining since 2013. The lackluster results were an outcome of lower premium in the company’s Life and Retirement business and high catastrophe losses. Although the metric increased marginally in the first nine months of 2019, its persistent downtrend poses a threat to the company.
The company’s property and casualty business exposes it to weather-related losses. It has been incurring catastrophe losses over the years, which weighed on its underwriting margins. The company’s susceptibility to weather-related losses might continue to hurt its earnings.
Moreover, the company’s debt load has been consistently rising since 2015. Its debt-to-equity ratio of 52.3% is higher than the industry average of 41.7%. Further, times interest earned ratio declined to 3.43X from 7.1X in 2014 (lower than the industry average of 8.8), reflecting the company’s reduced ability to meet interest payments, thereby exposing it to high financial risks.
The company’s 4.2% return on equity is lower than its industry average of 8.1%. This underlines the company’s relative inefficiency in utilizing its shareholders’ funds.
Will the Stock Bounce Back Soon?
The company has taken a number of growth initiatives, such as containing expenses to generate operating efficiency, reduction in headcount, freezing of pension plans and divestiture of its underperforming units. However, a complete impact of these strategic steps is yet to reflect on the company’s results.
The company continues to execute actions focused on organizational simplification, operational excellence and business rationalization.
It has also been streamlining its core insurance operations and restructuring businesses by axing unwanted operations, thereby enhancing capital allocation and operating leverage. Since 2008, the company has made more than 50 asset sales and divestitures, leading to proceeds in excess of $100 billion. These divestments were done to generate money for repaying the bailout funds to the U.S. government, realign the company with huge unrelated operations creating very little synergistic benefits, focus on core operations to reap higher returns on equity and utilize finances for share buybacks.
The company has also been trying to expand its business through strategic acquisitions. CEO Brian Duperreault made a significant shift in its capital deployment and now expects to utilize the same for possible buyouts in the international markets, thus boosting the company’s personal and life segments plus investing in the domestic middle market as opposed to its hitherto usage of capital resources for share repurchases.
A Glance at the Industry
The insurance industry is thriving on the back of rising premium in most of its business lines, sound financial strength and the use of technology for increasing operational efficiency.
Also, surplus capital levels across the industry led to record share buybacks and dividend hikes, increasing shareholders’ returns.
The companies are well-poised for growth on the back of tactical acquisitions, higher premium pricing, etc. Growing adoption of technologies like AI, robotic process automation, cognitive intelligence or blockchain and cloud computing should help insurers control costs. A solid financial standing should continue to support growth strategies, mergers and takeovers, et al.
However, multiline insurers’ profits are vulnerable to catastrophes because of the presence of property coverage in their bundle.
Choosing Favorable Insurance Stocks
While American International Group doesn’t appear an attractive pick right now, there are a few insurance stocks that can be good investment options. Before we check out those, let’s see how the industry is performing.
The group’s Zacks Industry Rank is basically the average of the Zacks Rank of all-member stocks.
The Zacks Multi line-Insurance industry currently carries a Zacks Industry Rank #47, thus placing it at the top 19% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Let us take a look at some of the Zacks Rank #2 (Buy) stocks. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
ageas SA AGESY deals in insurance business across Europe and Asia. The company primarily offers property, casualty and life insurance products as well as pension plus reinsurance products. The company has a VGM Score of B, vouching for its impressive prospects.
In six months’ time, the company has lost 10.6%, outperforming its industry's growth of 0.2%.
MGIC Investment Corporation MTG provides private mortgage insurance, other mortgage credit risk management solutions and ancillary services to lenders and government sponsored entities in the United States. It has a VGM Score of B.
For 2020, the stock’s earnings estimates are expected to be $1.80, indicating a 2.1% upside from the year-ago reported figure. The company’s sales are also likely to rise 6%.
Shares of the company have inched up 2.1% in the past six months, outperforming its industry’s rise of 0.2%.
MetLife, Inc. MET is dealing in insurance, annuities, employee benefits and asset management businesses. The company offers life, dental, group short- and long-term disability, individual disability, accidental death and dismemberment, vision, and accident and health coverages as well as prepaid legal plans, etc. The company flaunts a VGM Score of B.
The company has gained 0.8% in six month’s time, better than its industry’s growth of 0.2%. The stock’s 2020 earnings estimates are pegged at $6.10, suggesting an improvement of 10.3% from the year-earlier reported figure. Also, sales are likely to perk up 2.4% this year.
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MGIC Investment Corporation (MTG) : Free Stock Analysis Report
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