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Will Cat Loss Ail American International in Q4 Earnings?

Zacks Equity Research

American International Group Inc.’s AIG fourth-quarter 2018 earnings due on Feb 13, 2019, will most likely be affected by a challenging property and casualty market, unfavorable foreign exchange volatility, credit and equity market conditions and catastrophic claims. The Zacks Consensus Estimate for earnings per share of 47 cents points to a year-over-year decline of 17.5%.

The company’s General insurance segment’s net premiums written are likely to have benefited from the accretion of Validus acquisition and the strength in business, partially offset by the sale of certain insurance operations and assets to Fairfax. The Zacks Consensus Estimate for the segment’s net premiums written is pegged at $6.23 billion, up 5.8% year over year.

AIG made a consistent progress with its restructuring initiatives in the third quarter, most notably in General Insurance. The company expects to achieve the full $450-million annual run rate expense savings for 2018, which will possibly aid the segment’s margins. The company estimates to incur catastrophe loss of $750-$800 million for the fourth quarter. This includes weather-related loss suffered during October and November. This loss will affect the company’s General Insurance segment, which contributed to nearly 65% of its adjusted revenues in the first nine months of 2018. This weather-oriented loss will weigh on the company’s profitability in the fourth quarter.

In its life business, total premiums and deposits have probably increased and the company steadily burgeoned sales in the United States along with registering strong new business growth in the UK.

Another revenue driver is the company’s net investment income, which declined in the first nine months of 2018. Despite the rising interest rates, net investment income decreased 9% during the nine-month period due to a not-so-good performance in alternative investments. For the fourth quarter, the same is anticipated to be $3.35 billion, down 3.2% year over year.

Management has made a significant shift in the company’s capital utilization strategy in a bid to turn the stock around and attain greater profitability. Now, the same expects to utilize capital for potential buyouts in the international markets, thereby boosting the company’s personal and life lines segments plus investing in the domestic middle market as opposed to its usage of capital resource for share repurchases. Thus, a lower amount of share buyback will somewhat be less accretive to the bottom line.

Earnings Surprise History

The company has a dismal earnings surprise history with estimate misses in each of the last four reported quarters, the average negative surprise being 160%. This is depicted in the chart below:

American International Group, Inc. Price and EPS Surprise

American International Group, Inc. Price and EPS Surprise | American International Group, Inc. Quote

What the Quantitative Model States

Our proven model does not conclusively show that AIG is likely to beat on earnings this to-be-reported quarter. This is because a stock needs to have both a positive Earnings ESP and a favorable Zacks Rank #1, 2 or 3 for this to happen. But that is not the case here as you will see below.

Earnings ESP: AIG has an Earning ESP of -16.1%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: AIG carries a Zacks Rank #4 (Sell), which lowers the predictive power of ESP. Further, a negative ESP in the combination reduces the odds of a likely earnings surprise. We caution against Sell-rated stocks (4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies that you may want to consider as these have the right combination of elements to beat on earnings this reporting cycle:

Bank of Montreal BMO is set to release results on Feb 26. The company has an Earnings ESP of +0.30% and a Zacks Rank #3 (Hold).  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Garrison Capital Inc. GARS has an Earnings ESP of +11.94% and a Zacks Rank #2 (Buy). It is set to release quarterly numbers on Mar 5.

American Tower Corporation (REIT) AMT has an Earnings ESP of +0.29% and a Zacks Rank of 3. The company is scheduled to release fourth-quarter earnings on Feb 27.


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