The stock of American International Group Inc. (AIG - Free Report) seems to be in rough waters. The company is struggling with property and casualty market challenges that are dragging down revenues of one of its most important segment — Commercial Insurance.
Other macro factors such as low interest rates, currency exchange rates, credit and equity market conditions, catastrophic claims events are also acting as dampeners.
Whats dragging down the stock
AIG’s top line has suffered over the years from declining premium due to disciplined underwriting, competitive market conditions and reduction in business due to numerous divestitures taken.
This is evident from shrinking revenues since 2010 (except in 2012) that continued till the first half of 2017. The company is unlikely to see any respite in the coming quarters as a highly competitive property and casualty market, and continued business dispositions will keep the top line under pressure.
AIG is aggressively looking to mend its commercial lines business but has also confessed to a tough market environment, which may require axing of some lines that fail to meet profitability targets. This will lead to forgone business which will further compress top-line growth.
The company became a victim of its own mammoth size with numerous unrelated business under its umbrella that created very little or no synergy. Many of its low return-generating business lines along with an ailing industry dragged down results to such an extent that it led activist investor Carl Icahn to call for rapid reforms at the company.
Icahn demanded the sale of non-core parts of the company and reduction of its size to a manageable level. Management therefore took a number of steps aimed at rightsizing operations by cutting workforce, divesting units, reducing expense, making leadership changes, and returning funds to shareholders through share buyback and dividend payments.
Though these measures helped in cutting costs and returning capital to share holders, the company was unable to address revenue-growth challenges in Commercial Insurance.
Share Price Performance
Year to date, shares of AIG have lost 7.1%, significantly underperforming the industry’s gain of 10.7%. Even the recent second-quarter results which came in better than expected (beating the estimates by 27.5%) offered no help to the stock, which has lost 7.9% since the earnings release compared with the decline of 5.5% endured by the industry.
The company’s shares must have taken a beating due to the discontinuance of guidance and management targets. The absence of forward guidance or targets has cast doubts over the company’s future profitability. Management, however, disclosed a shift in its capital utilization strategy. It will now utilize capital for possible acquisitions in international markets, personal and life lines, and domestic middle market as opposed to significant capital used for share repurchases till now.
Though the acquisitions to be made by the company will expand its business, these may not be accretive to earnings immediately. On the other hand, the bottom line will be bereft of support provided by significant buybacks till now. This will likely drain earnings in the coming quarters.
Though the company has undertaken massive turnaround initiatives and has changed its leadership in the hope that the new management will bring stability, investors will remain skeptical for some time before these actions are reflected in its financials. Till then, the stock is expected to remain under pressure.
AIG carries a Zacks Rank #3 (Hold). Some better-ranked players in the space are Atlas Financial Holdings, Inc. (AFH - Free Report) , Markel Corporation (MKL - Free Report) and Mercury General Corporation (MCY - Free Report) . Each of these stocks carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Atlas Financial provides commercial automobile insurance policies primarily in the United States through its subsidiaries. It beat estimates in two of the last four quarters with an average positive surprise of 57.9%.
Markel markets and underwrites specialty insurance products and programs to a variety of niche markets. It surpassed estimates in two of the last four quarters with an average positive surprise of 21.1%.
Mercury General is engaged primarily in writing all risk classifications of automobile insurance in a number of states, principally California. It beat estimates in three of the last four quarters with an average positive surprise of 1.1%.
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