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AIG Gearing Up for Q2 Earnings: Will the Stock Surprise?

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American International Group, Inc. (AIG - Free Report) is scheduled to report second-quarter 2017 results on Aug 2, after market close.

Helped by a reduction in operating costs, AIG surpassed the Zacks Consensus Estimate last quarter by 22.5%. Results reflected strong operating performance at both its Consumer and Commercial Insurance segments, favorable alternative investment return and lower-than-expected catastrophe losses.

The company, however, does not have an impressive surprise history. Although it beat estimates in two of the last four quarters and missed in two, it witnessed an average negative surprise of 4.85%. This is depicted in the graph below:

Let’s see how things are shaping up for this announcement.

Q2 Flashback

We expect performance at its Commercial Lines segment to remain stressed. Net premium written in the segment decreased 25% in 2016 and the decline continued in the first quarter. Given that the company has exited some of its casualty lines business, we expect the top line to remain under pressure over the coming quarters. The effect of the same will be seen in the to-be reported quarter.

The company’s Individual Retirement business is weighed down by uncertainty stemming from the Department Of Labor’s fiduciary rule and lower fixed annuity sales due to the prevailing low interest rate environment. This resulted in lower sales in the past several quarters. Though the company has undertaken remedial measures such as making changes to product pricing, product features and asset quality, we don’t expect much improvement in sales in the upcoming release.

In its Life Insurance business, recently, the company introduced a new administrative platform and digital capabilities, revamped its product suite, and substantially exited its U.S. life career distribution channel, service agent channel, and subscale group benefits business. These steps were undertaken to enhance ROE from this line of business. The efforts paid off as evident by an increase in life insurance sales in the first quarter as we expect to see further sales growth in the second quarter.

Management’s efforts toward saving costs will accrue to its bottom line. In 2016, the company was ahead of its expense reduction target of $1.4 billion and decreased the same by over $1 billion or 10%. In the first quarter, its general operating and other expenses declined 18.6%. We expect to see a moderation in expenses in the to-be reported quarter.

The company is also aggressively buying back shares in sync with its capital return target of $25 billion. In the first quarter, the company committed $7 billion of capital for share buyback and dividend for rest of the year. We believe substantial repurchase of shares will aid the company’s bottom line.

We also expect to see an improvement in return on equity driven by the company’s continued active capital management and operating improvement.

Earnings Whispers

Our proven model does not conclusively show that AIG is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. This is not the case here as you will see below.

Zacks ESP: AIG has an Earning ESP of -0.83%. This is because the Most Accurate estimate of $1.19 per share is a penny below the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: AIG carries a Zacks Rank #4 (Sell). We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some companies that you may consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:  

Fiserv, Inc. (FISV - Free Report) will report second-quarter 2017 earnings results on Aug 1. The company has an Earnings ESP of +1.63% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Voya Financial, Inc. (VOYA - Free Report) has an Earnings ESP of +1.18% and a Zacks Rank #3 (Hold). The company is expected to report second-quarter earnings results on Aug 1.

CME Group Inc. (CME - Free Report) has an Earnings ESP of +0.83% and a Zacks Rank #3. The company is expected to report second-quarter earnings results on Aug 1.

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