American International Group, Inc. (AIG - Free Report) is well-poised for growth on the back of strong underwriting results, reinsurance program and robust capital position.
The expected long-term earnings growth rate of this multiline insurer is 10%, better than the industry’s average expectation of 6.6%.
Return on equity of 3.3% as of Jun 30, 2020 compares favorably with the prior-year quarter’s figure of 3%, which implies efficient utilization of shareholders’ funds.
Factors Driving AIG
This Zacks Rank #3 (Hold) company has been benefiting from a diversified business mix comprising property and casualty (P&C), accident & health, life insurance and annuity operations. This has enabled AIG to effectively manage risks and provide retirement solutions for individuals and businesses globally.
Now let’s take a look at the company’s two core businesses — General Insurance and, Life and Retirement. The general insurance business, which has been witnessing strong underwriting results, primarily offers insurance products and services for commercial and personal insurance clients. Consistent underwriting actions have resulted in 1930 basis points (bps) improvement in combined ratio during the past three years.
Moreover, AIG is well poised to benefit from its reinsurance program, which has somewhat shielded those lines of business most impacted by the COVID-19 pandemic against the pandemic-related losses. The company anticipates positive rate movement across all its reinsurance lines for the rest of 2020.
Coming to its Life and Retirement business now, the company has been focused in offering long-term retirement benefits for retirees by rolling out several enhanced retirement solutions. This business is even backed by a diversified distribution network.
Furthermore, AIG has been effectively managing risks on the back of disciplined underwriting actions. It has kept on de-risking the investment portfolio since 2015, which is valued at $350 billion as of Jun 30, 2020.
Case in point, Syndicate 2019, which AIG had planned to introduce through the Lloyd’s market last year in October, got a nod this year in May for commencing underwriting operations. The launch is expected to benefit high net worth clients of AIG Private Client Group (PCG), which is a unit of AIG’s member companies. It is to be noted that the high net worth clients will get exposure to enhanced products and risk management solutions offered through the Lloyd’s market.
It is worth mentioning that AIG 200, which is the company’s transformation program, is primarily intended to boost underwriting expertise and operational efficiency of AIG. It is well on track to achieve $300 million in exit run rate savings for this year and $1 billion in overall run rate savings by 2022-end from AIG 200 initiative, which costs $1.3 billion to the company.
Additionally, the company enjoys strong credit ratings from renowned agencies. It also boasts of a strong capital position, which enables it to reward shareholders via share buybacks and dividend payments. Its dividend yield of 4.7% compares favorably with the industry average of 3.1%.
However, shares of AIG have lost 51.4% in a year compared with the industry’s decline of 25.5%. The company’s high level of debt compared to liquidity position might make it difficult to service debt amid the difficult operating environment.
Nevertheless, we believe that the multiline insurer’s strong fundamentals are likely to help the stock bounce back in the days ahead.
Stocks to Consider
Some better-ranked stocks in the insurance space are Assurant, Inc. (AIZ - Free Report) , James River Group Holdings, Ltd. (JRVR - Free Report) and First American Financial Corporation (FAF - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Assurant, James River Group and First American Financial surpassed earnings estimates in each of the trailing four quarters by 6%, 14.86% and 20.84%, respectively, on average.
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