Global multi-line insurer – American International Group Inc. (AIG) – is scheduled to release its fourth-quarter 2014 financial results after the closing bell on Feb 12.
In the last reported quarter, the company delivered a positive earnings surprise of 12%. Notably, AIG has maintained its earnings streak in the trailing four quarters with an average beat of 15.7%. Let us see how things are shaping up for this announcement.
Earnings Whispers?
Our proven model shows that AIG is unlikely to beat earnings as it lacks the required combination of two key components.
Zacks ESP: AIG has a negative Zacks ESP. That is because Expected Surprise Prediction or Earnings ESP, which represents the difference between the Most Accurate estimate of $1.04 per share and the Zacks Consensus Estimate of $1.08, is -3.7%.
Zacks Rank: AIG’s Zacks Rank #3 (Hold) increases the predictive power of ESP. However, we need a positive ESP to be confident of an earnings beat. Hence, this combination of Zacks Rank #3 and an ESP of -3.7% deters us from making a conclusive outcome.
Conversely, Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement, especially when the company is witnessing negative estimate revisions.
Factors that Warrant Attention
Despite an aggressive business restructuring and streamlining it toward core operations over the past several quarters, AIG’s core property-casualty (P&C) and life-retirement businesses are yet to gain significant traction. Subsequently, total premiums had dipped 1.8% year over year in 2013 and remained flat in the first nine months of 2014, reflecting a decline in life-retirement operations, while P&C premiums are expected to generate in low single-digit growth in the upcoming quarters. Even underwriting results, which recorded a loss of $165 million in the first nine months of 2014 against $125 million in the year-ago period, casts a bleak outlook.
The persistently low interest rate environment, catastrophe losses in P&C segment, competitive pressure and other volatile financial drivers continue to restrict the desired upside in these businesses, thereby hurting the bottom line and return on equity. Additionally, the litigation liabilities, particularly, the $960 million dumped in escrow account in Oct 2014 to settle consolidated class-action lawsuits pending court approval, pose ample financial risks going forward.
Nonetheless, a strong operating flow ($4.36 billion in the first nine months of 2014) and improved financial leverage (15.8% at Sep 2014-end against 17.3% at 2013-end) enhance capital flexibility and provide buoyancy for long-term growth. A strong capital position also facilitates efficient capital deployment, as reflected by dividend payouts, two share repurchase programs totaling $3.5 billion authorized in 2014, and bond repurchases worth $2.5 billion in Jul 2014 and $1.6 billion in Oct 2014.
Other Stocks to Consider
Here are some other companies you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:
Assured Guaranty Ltd. (AGO) has an Earnings ESP of +13% and a Zacks Rank #1 (Strong Buy).
HCI Group Inc. (HCI) has an Earnings ESP of +4.4% and a Zacks Rank #1.
Radian Group Inc. (RDN) has an Earnings ESP of +13.9% and a Zacks Rank #2 (Buy).
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