American International Group, Inc. AIG is in troubled waters, thanks to challenges in the property and casualty markets that have dented revenues in one of its most important business — the General Insurance.
Other macro factors such as low interest rates, currency exchange rates, credit and equity market conditions as well as catastrophic events have also acted as dampeners.
These factors have dented the company’s price performance. In a year's time, shares of the company have lost 23.6% compared with the S&P 500 Index's gain of 3%.
The stock has witnessed 0.6% downward revision in 2019 earnings estimates to $4.40 in the past seven days. Considering the headwinds, we believe that the stock will be under pressure in the upcoming quarters.
Factors Hurting the Stock
Dismal Top line: The company’s revenues have suffered over the years from declining premium due to disciplined underwriting, competitive market conditions and reduction in business stemming from numerous divestitures. This is evident from declining revenues since 2013 that continued in 2018. Challenges in the property and casualty market as well as continued business dispositions will keep the top line under pressure.
Weakness in General Insurance Segment: This segment has reported a decline in premium written since 2016. Though the same witnessed a reversal in 2018 with premium written up by 4%, the profitability of the segment, as measured by underwriting income, amounted to a loss of $3.1 billion (down from underwriting loss of $4.5 billion in 2017). Though, the results show that a number of growth initiatives (reinsurance deal with Validus, cost control efforts, acquisition of Glatfelter, hiring industry leaders in key positions and others) undertaken in this segment are beginning to yield, the positive effect of the same in the underwriting results are still awaited.
Exposure to Catastrophe Loss: The company’s nature of operations exposes it to weather-related losses. It incurred catastrophe loss of $4.17 billion in 2017, up 213% year over year. In 2018, losses from the same were $2.9 billion. These losses have historically imparted volatility to the company’s earnings and will continue to be a headwind going forward.
Low Net Investment Income: In 2018, the company’s net investment income declined due to lower investment returns, primarily caused by lower hedge fund performance and decline in income from fixed maturity securities. In 2019, we expect net investment to be under pressure due to dovish stance of Fed, which might result in no interest rate hike in 2019. This will keep investment yields at low levels and constrain net investment income.
High Debt Level: The company’s debt is rising consistently since 2015. Its debt to equity ratio of 60% is higher than the industry average of 48.5%. Moreover, times interest earned ratio has declined to 1.2 from 2.3 in 2017. A fall in the same signifies reduced ability of the company to serve on interest payments.
Decline in Return on Equity (ROE): The most important measure of a company’s profitability, measured by ROE has declined to 2.1% from 4.1% in 2017. This is lower compared with the industry’s ROE of 8.1%, which also signifies the company’s operating inefficiency.
American International carries a Zacks Rank #5 (Strong Sell). A few better-ranked stocks in the same space are Cincinnati Financial Corporation CINF, RLI Corp RLI and The Allstate Corporation ALL.
Cincinnati Financial provides property casualty insurance products in the United States. It came up with a positive surprise of 22.50% in the last reported quarter. The stock sports a Zacks Rank #1 (Strong Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.
RLI, an insurance holding company, underwrites property and casualty insurance in the United States and internationally. The company delivered 566.67% positive earnings surprise in the last reported quarter. The stock carries a Zacks Rank #2.
Allstate provides property and casualty, as well as other insurance products in the United States and Canada. The company delivered 22.77% positive earnings surprise in the last reported quarter. The stock carries a Zacks Rank #2.
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