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AIG in Rough Waters: What's Dragging the Stock Down?
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The stock price of property and casualty insurer, American International Group, Inc. (AIG - Free Report) , has plunged 6% year to date, significantly underperforming the Zacks categorized Insurance Multi Line industry’s 0.3% gain.
Stock price largely reflects the health of a company, and AIG has been troubled by a host of factors for past several months. In fact, its failing health compelled investors Carl Icahn and John Paulson to interfere and push the CEO to improve its profitability. But after a massive earnings miss of 32% in the fourth quarter of 2016, the CEO’s ability to turn around the company was questioned. Then, amid dwindling shareholder support, he ultimately resigned from his post.
What Hurt AIG So Badly?
The company became a victim of its own mammoth size with immensely diversified operations that did not generate enough synergy. The company’s revenues have been declining secularly since 2012. Recent quarterly results indicate continued underperformance by its Commercial lines business, which contributed 41% to the total revenue in 2016. The segment reported pre-tax operating loss of $2.74 billion against profit of $565 million in 2015. This underperformance stemmed from a weak financial and liability business that resulted in pre-tax operating loss of $2.64 billion, way wider than the loss of $661 million in 2015.
The company also took a $5.6 billion pretax charge to add to its claims reserves. This claim was larger than expected and led to one of the company's worst quarters since the financial crisis. Prior to this, in the fourth quarter of 2015, the company had added $3.6 billion to its reserves. This reserve addition at that time gave a signal that the company has adequately equipped itself to pay claims. The latest reserve charge pertaining to the policies written from 2006–2016, has shaken investors confidence in the company and raised questions about the company’s underwriting discpline.
Net premium written in the Commercial Lines segment declined 25% in 2016. Given that the company has exited some of its casualty lines business we expect top line to remain under pressure. Also, the company had a two-year plan to improve the segment’s profitability. But with significant loss in the quarter, it seems difficult for the company to achieve its goal within the target time.
Can AIG Turn Around?
The company has, however, undertaken a number of turnaround initiatives such as divestiture of parts of business and assets, increase in share buyback, dividend hike, personnel changes, cost control, reinsurance deals, and lowering of hedge fund investments to check earnings volatility. Some of these measures such as capital return of $13 billion in 2016 have also paid off. This keeps the company on track to return $25 billion of capital by the end of 2017 as promised. It also reduced its hedge fund portfolio by $3.2 billion in 2016, freeing up approximately $1.1 billion in capital; and reached its two-year targeted expense cut of $1.4 billion (through the end of 2017), a year ahead of plan.
But these efforts fall short and many more reforms are called for. We choose to remain cautious on the stock till we gain confidence in the ability of its new management to steer the company toward profitability.
Zacks Rank & Key Picks
AIG carries a Zack Rank #3 (Hold). Some better-ranked stocks from the broader finance sector are American Financial Group, Inc. (AFG - Free Report) , The Progresssive Corporation (PGR - Free Report) and Everest Re Group, Ltd. . While American Financial and The Progressive Corp. sport a Zacks Rank #1 (Strong Buy), Everest Re holds a a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
American Financial offers P&C insurance products in the United States. The company delivered positive surprises in three of the last four quarters with an average beat of 6.45%.
The Progressive Corp. is an auto insurance company. The company delivered a positive surprise in two of the last four quarters but with an average positive surprise of 1.32%.
Everest Re offers reinsurance and insurance products. The company delivered positive surprises in three of the last four quarters with an average beat of 43.49%.
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AIG in Rough Waters: What's Dragging the Stock Down?
The stock price of property and casualty insurer, American International Group, Inc. (AIG - Free Report) , has plunged 6% year to date, significantly underperforming the Zacks categorized Insurance Multi Line industry’s 0.3% gain.
Stock price largely reflects the health of a company, and AIG has been troubled by a host of factors for past several months. In fact, its failing health compelled investors Carl Icahn and John Paulson to interfere and push the CEO to improve its profitability. But after a massive earnings miss of 32% in the fourth quarter of 2016, the CEO’s ability to turn around the company was questioned. Then, amid dwindling shareholder support, he ultimately resigned from his post.
What Hurt AIG So Badly?
The company became a victim of its own mammoth size with immensely diversified operations that did not generate enough synergy. The company’s revenues have been declining secularly since 2012. Recent quarterly results indicate continued underperformance by its Commercial lines business, which contributed 41% to the total revenue in 2016. The segment reported pre-tax operating loss of $2.74 billion against profit of $565 million in 2015. This underperformance stemmed from a weak financial and liability business that resulted in pre-tax operating loss of $2.64 billion, way wider than the loss of $661 million in 2015.
The company also took a $5.6 billion pretax charge to add to its claims reserves. This claim was larger than expected and led to one of the company's worst quarters since the financial crisis. Prior to this, in the fourth quarter of 2015, the company had added $3.6 billion to its reserves. This reserve addition at that time gave a signal that the company has adequately equipped itself to pay claims. The latest reserve charge pertaining to the policies written from 2006–2016, has shaken investors confidence in the company and raised questions about the company’s underwriting discpline.
Net premium written in the Commercial Lines segment declined 25% in 2016. Given that the company has exited some of its casualty lines business we expect top line to remain under pressure. Also, the company had a two-year plan to improve the segment’s profitability. But with significant loss in the quarter, it seems difficult for the company to achieve its goal within the target time.
Can AIG Turn Around?
The company has, however, undertaken a number of turnaround initiatives such as divestiture of parts of business and assets, increase in share buyback, dividend hike, personnel changes, cost control, reinsurance deals, and lowering of hedge fund investments to check earnings volatility. Some of these measures such as capital return of $13 billion in 2016 have also paid off. This keeps the company on track to return $25 billion of capital by the end of 2017 as promised. It also reduced its hedge fund portfolio by $3.2 billion in 2016, freeing up approximately $1.1 billion in capital; and reached its two-year targeted expense cut of $1.4 billion (through the end of 2017), a year ahead of plan.
But these efforts fall short and many more reforms are called for. We choose to remain cautious on the stock till we gain confidence in the ability of its new management to steer the company toward profitability.
Zacks Rank & Key Picks
AIG carries a Zack Rank #3 (Hold). Some better-ranked stocks from the broader finance sector are American Financial Group, Inc. (AFG - Free Report) , The Progresssive Corporation (PGR - Free Report) and Everest Re Group, Ltd. . While American Financial and The Progressive Corp. sport a Zacks Rank #1 (Strong Buy), Everest Re holds a a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
American Financial offers P&C insurance products in the United States. The company delivered positive surprises in three of the last four quarters with an average beat of 6.45%.
The Progressive Corp. is an auto insurance company. The company delivered a positive surprise in two of the last four quarters but with an average positive surprise of 1.32%.
Everest Re offers reinsurance and insurance products. The company delivered positive surprises in three of the last four quarters with an average beat of 43.49%.
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020. Click here for the 6 trades >>