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Bear of the Day: American International Group

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After nearly collapsing during the financial crisis in 2008, American International Group (AIG - Free Report) was once of the most high-profile beneficiaries of U.S. government intervention in the Troubled Asset Relief Program, commonly referred to as TARP.

Having decided that the failure of AIG, with its large and diverse basket of assets and liabilities would cause catastrophic damage to the U.S. financial system and economy, the U.S. became AIG’s largest shareholder, at one point owning 61% of the company’s shares.  The program mandated significant changes to AIG’s structure, including a new corporate  governance structure, and a reduction in exposure to risky derivative securities.

By 2012, the U.S. Treasury and federal Reserve had not only recouped all of the $182 billion they had staked to the bailout, but after selling all of its remaining shares, actually posted a profit of nearly $23 billion on the transaction.

Thanks to the austerity measures levied on the company while under government ownership, AIG has never returned to the high-flying status it enjoyed before the crisis.

As the table above shows, the size of the company was cut by nearly 50% in terms of assets and its exposure to derivatives was lowered by over 90%.

Although a much safer and more stable company, the huge insurer is a mere shadow if its former self in terms of profits.  Even in an environment of low interest rates, a rising stock market and softening regulations that should benefit financial companies, AIG has underperformed, with shares up just 34% in the past 5 years versus an average of better than 50% for the insurance industry. 2018 has been even worse, with the stock down 7% YTD.

AIG has missed earning estimates in the past 3 quarters, most recently reporting a profit of $1.04/share in Q1, well short of the Zacks Consensus Estimate of $1.24.

Analyst expectations have been falling and the full year 2018 estimate, now stands at $4.95/share, down from $5.67 90 days ago, thanks to 8 recent downgrades.  AIG is a Zacks Rank #5 (Strong Sell).

In  poor sign for the company, AIG suffered outsize losses in 2017, especially in its European unit, with CEO Anthony Baldwin commenting “…our performance was impacted by a combination of natural catastrophes, continued competitive pressure and low investment returns.”

In response, AIG has taken steps to reduce volatility by lowering risk limits and improving risk selection.  Unfortunately, insurance companies don’t make money by avoiding risk, they profit from taking risks -provided that they are priced correctly.  The reduction in exposure will likely means that AIG’s erning will stagnate for the foreseeable future.

Investors interested in insurance companies should instead consider Aegon NV (AEG - Free Report) or the Kemper Corporation (KMPR - Free Report) , both Zacks Rank #1 (Strong Buy).

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Kemper Corporation (KMPR) - free report >>

American International Group, Inc. (AIG) - free report >>

Aegon NV (AEG) - free report >>

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