The stock of American International Group Inc. AIG has fallen out of favor with investors, having missed estimates in five quarters on the trot 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.
Why is the Stock Down?
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 Show Up?
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.
A Glance at the Industry
The Insurance industry is on a solid footing now with huge surplus capital, rising premium rates in many business lines, increasing interest rates and a solid economy.
The industry is witnessing an increase in premium in Commercial insurance, which accounts for about half of U.S. property/casualty insurance industry premium. The rate increase seen now is a result of players’ response to catastrophe loss sustained in 2017, which led them to hike premium to recover losses across the affected insurance lines. This is a welcome development after the industry saw soft market conditions in three years prior to 2017.
Personal lines premium is also rising after remaining low from past many years. Interest rate hikes by the Federal Reserve also bode well for net investment income of insurers, as funds gets higher interest income.
Also, surplus capital levels across the industry has led to record share buybacks and dividend hikes which leads to increased shareholder returns.
Strong Zacks Industry Rank Indicates Improvement Prospects
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 #106, thus placing it at the top 41% 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.
Though the industry has lagged the broader markets by declining 16% in a year’s time compared with the Zacks S&P 500 composite growth of 0.10%, a strong industry ranking shows that the industry is poised to gain from its favorable operating conditions.
Let us look at some of the Zacks Rank #2 (Buy) stocks with a Value Style Score of A or B. Our research shows that stocks with a Value Style Score of A or B when combined with a Zacks Rank #1 or 2 offer the best opportunities in the value investing space. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
FBL Financial Corp. FFG with a Zacks Rank #2 deals in life insurance, annuities, property-casualty insurance and mutual funds to individuals and small businesses in 15 midwestern and western states in the United States.
The stock has seen the Zacks Consensus Estimate for current year as well as 2019 earnings being revised 1.9% and 0.4% upward over the last 30 days. It carries a Value Style Score of B.
Old Republic International, Corp. ORI with a Zacks Rank #2 markets, underwrites and provides risk management services for a wide variety of coverages mostly in the general and title insurance fields.
The stock has seen the Zacks Consensus Estimate for current-year earnings being revised 5.7% upward over the last 60 days. It carries a Value Style Score of A.
MetLife Inc. MET is a global provider of insurance, annuities and employee benefit programs. MetLife holds leading market positions in the United States, Japan, Latin America, Asia, Europe, the Middle East and Africa.
The stock has seen the Zacks Consensus Estimate for current-year earnings being revised 2.7% and 0.9% upward over the last 30 days. It carries a Value Style Score of A.
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