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Will California Fire & Commercial Unit Hurt AIG Q4 Earnings?

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American International Group Inc. (AIG - Free Report) is scheduled to report fourth-quarter 2017 results on Feb 8, after market close. Results are expected to suffer from weak performance of its Commercial segment, loss from catastrophes and a lower amount of share buyback.

The company’s Commercial insurance segment has been underperforming for several quarters. In 2016, the segment reported a pre-tax operating loss of $2.74 billion while the same registered $1.3 billion in the first nine months of 2017. The segment is reeling under a rise in core losses and adverse development to account for current loss trends. Given that the company has exited some of the casualty lines business, we expect the top line to remain under pressure.

The company’s nature of operations exposes it to weather-related losses. Catastrophes have historically imparted volatility to the company’s earnings. The company suffered nearly $3 billion of losses from the recent catastrophic events. AIG expects to incur loss of $500 million from the California wildfires that will hurt fourth-quarter margins. Other players in the same industry, Travelers Companies (TRV - Free Report) , incurred a loss of $499 million from the same calamity, while Chubb Ltd. (CB - Free Report) suffered a loss of $477 million.

The company’s newly appointed CEO has made a significant shift in its capital utilization strategy in a bid to turn the stock around and achieve greater profitability. Management now expects to utilize capital for possible acquisitions in international markets, boosting the company’s personal and lifeline segments plus investing in the domestic middle market as opposed to its hitherto usage of capital resource for share repurchases. Thus, a lower amount of share buyback will somewhat be less accretive to the bottom line.

Margins will however, see an upside from its cost-control efforts. Some of the actions in this regard were a reduction in headcount, freezing of pension plans and divestiture of underperforming units. These steps led to a 13.4% decline in gross operating expense in 2016, which went further down by 14.5% year over year in the first nine months of 2017. We believe that the company’s strict cost controls will provide an extra cushion to its operating margins.

Earnings Surprise History

The company does not have an attractove earnings surprise history. It missed earnings estimates in two of the last four quarters with an avearge negatove surprise of 7.3%. This is depicted in the chart below:

American International Group, Inc. Price and EPS Surprise

Here is What Our Quantitative Model Predicts

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

Zacks ESP: American International has an Earnings ESP of -14.81%. You can uncover the best stocks to buy or sell before they’re reported with our  Earnings ESP Filter.

Zacks Rank: American International carries a Zacks Rank #3, which increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise. The company’s -14.81% ESP thus leaves the case inconclusive.

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

A Stock That Warrants a Look

Here is a stock that you may consider as our model shows that it has the right combination of elements to post an earnings beat this quarter:  

CNA Financial Corp. (CNA - Free Report) will report fourth-quarter 2017 earnings results on Feb 12. The company has an Earnings ESP of +2.75% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

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