American International Group, Inc. AIG is struggling with market turbulences characterized by factors like the COVID-19 impact and the governmental and societal actions in response to the prevalent crisis, historically low interest rates and the global economic downturn.
The stock has witnessed its current-year Zacks Consensus Estimate being revised 0.7% downward over the past seven days to $2.58 per share. The company’s bottom line also missed estimates in each of the last two quarters due to decline in business and COVID-19-related losses.
The stock currently carrying a Zacks Rank #4 (Sell) has lost 45% year to date compared with the industry’s decline of 25.3%.
The company’s stock performance lags other companies’ stock movements in the same space, such as MetLife Inc. MET, Prudential Financial Inc. PRU and Lincoln National Corp. LNC, which have shed 26.9%, 28.1% and 40.8% of respective values over the same time frame.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Here we see some of the headwinds hounding the company:
Covid-19 Adversity: The company’s largest operating segment General Insurance incurred $730 million (in the first half of 2020) of estimated COVID-19 losses pertaining to travel, contingency, commercial property, trade credit, workers’ compensation and Validus.
The coronavirus outbreak caused a material reduction in second-quarter revenues, particularly within the Travel segment (given the travel restrictions imposed as a result of COVID-19 and the global slowdown) and other lines to a lesser degree. The recessionary impact of COVID-19 could adversely impact the company’s business , particularly in certain industry segments wherein demand dropped significantly and are likely to remain challenging for a period of time even after the COVID-19 crisis subsides.
In its Life Insurance business, the company experienced significant decreases in its premiums and deposits, primarily due to COVID-19-induced distribution channel disruptions and a decline in interest rates as well as adverse mortality experience.
Low Interest Rates: The low interest rate environment hampers the sales of interest rate sensitive products, such as annuities, premiums and deposits decreased in the first half of 2020 due to lower sales in Fixed and Index Annuities and Retail Mutual Funds.
Also, low interest rates hurt the profitability of the existing business as the cash flows are invested in low investment yields. We note that net investment income was down 23% year over year in the first half of 2020.
Additionally, persistence of low interest rates may escalate pension expense due to the impact of discounting the projected benefit cash flows.
Revenues Under Pressure: The company’s top line has been under pressure since the past several years. The same dropped 9.6% year over year in the first half of 2020. We believe, the revenue base will be stressed once again due to COVID-19-led disruption in the company’s business and the overall economic environment. The company also withdrew its previously-issued guidance including the one related to adjusted return on equity.
High Debt and Low Coverage: The company’s debt to equity ratio is higher than the industry’s average while its interest coverage ratio is lower than the industry’s tally. Given the tough operating condition weighing on the company, its debt load compared to its liquidity position might make it difficult to meet its obligations.
Exposure to Catastrophe Losses: The company also has an exposure to weather-related losses called catastrophe losses, which rendered volatility to its margins. These losses strained the company’s loss ratio, which drains its underwriting margins. This year’s hurricane season is expected to be above normal, which in turn, might elevate catastrophe losses.
Weak Return on Equity (ROE): The company’s ROE of 4.6% contracted 580 basis points year over year and is lower than the industry average of 8.3%. This reflects its relative inefficiency in utilizing its shareholders’ funds.
We believe, the top line will stay stressed under the COVID-19-led turmoil in the operational and economic environment. This in turn, will mar the company’s earnings prospects, which may further depreciate its share price. The company also suspended its earlier-provided outlook including the one related to its adjusted return on equity
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