The stock of American International Group Inc. (AIG - Free Report) took a beating after missing estimates in the second quarter. The company missed earnings by 12%, led by weak performance by the General Insurance segment and a low investment income.
Since the release of its earnings on Aug 3, its shares have declined 2.3%, underperforming the industry’s decline of 0.2%.
What Drained the Stock?
Revenues, which have been declining every year since 2013, continued the downward journey in the first half of 2018. Bottom line for the first six months also remained under pressure. Lackluster results were an outcome of weakness in the company’s General Insurance segment, high catastrophe losses and low investment income.
Second-quarter revenues remained under pressure due to decreasing premiums thanks to disciplined underwriting, competitive market conditions and reduction in business due to numerous divestitures.
First-half bottom line continued to show a decline, due to high catastrophe loss, which increased nearly 29%.
The company’s weakness in General Insurance has been a concern. This segment has reported a decline in premium written since 2016, a trend which continued in the first half of 2018. Its Commercial Lines business continues to face challenging market conditions, with excess capacity negatively impacting the rate environment and suppressing margins. Premium in the International sub-segment suffers from sale of interest in Ascot business and certain insurance operations to Fairfax. Also, lower production in Japan due to competition dented the top line in this segment. In light of the company’s reinsurance strategy and actions to manage the overall portfolio, management expects 2018 premium volume to be relatively flat with the 2017 levels.
Will The Stock Bounce Back?
We expect the Zacks Rank #3 (Hold) stock to bounce back as it gains from the following tailwinds:
Divestitures: Over the past few years, AIG has been streamlining its core insurance operations and restructuring businesses by axing operations, thereby enhancing capital allocation and operating leverage. Since 2008, the company has executed over 50 asset sales and divestitures, resulting in proceeds in excess of $100 billion. These divestitures were made to repay the bailout funds to the U.S. government, simplify the company which had huge unrelated operations creating very little synergistic benefits, focus on core operations generating higher return on equity, and generate funds for share buyback.
Acquisitions: AIG has announced that it will acquire Ellipse, a specialist provider of group life risk protection in the UK, from Munich Re. The transaction will strengthen AIG’s position in Life & Retirement businesses. The company recently completed the buyout of Validus Holdings, Ltd. which will strengthen its global General Insurance business.
The company’s CEO Brian Duperreault, appointed last year, has made a significant shift in its capital utilization and now expects to utilize capital for possible buyouts in the international markets, boosting the company’s personal and life lines segments plus investing in the domestic middle market as opposed to its hitherto usage of capital resource for share repurchases. This strategy should lead to long-term growth via business expansion.
Cost Control Efforts: One of the company’s top financial goals is to generate sustainable operating efficiency gains via reduction in net expenses. Such measures comprised a reduction in headcount, freezing of pension plans and divestiture of underperforming units, and led to a decline in expense in 2016, 2017 and in the first half of 2018. The company continues to execute initiatives focused on organizational simplification, operational efficiency and business rationalization. We believe that the company’s initiatives will result in strict cost control, which will provide an extra cushion to its operating margins especially at a time when the top line is under pressure.
Partnership with Carlyle: The company along with the The Carlyle Group (CG) has entered into a strategic partnership to build DSA Re into a standalone provider of reinsurance, claims handling, and run-off management solutions for long-dated, complex risks to the global insurance industry. This deal will help AIG to efficiently manage its legacy liabilities, honor its policy obligations and maximize financial flexibility, further allowing AIG to free up capital and participate in the build-out and growth of business.
Along with these, the company’s underwriting and increase in interest rate should support the company. Reserves were stable this quarter with no prior-year development and a favorable claims scenario are other positives.
Though we do not expect an immediate gain, but are hopeful for the stock’s gradual recovery as several growth initiatives start bearing fruit.
Some better-ranked stocks in the same space are Cigna Corp. (CI - Free Report) , Kemper Corp. (KMPR - Free Report) and MGIC Investment Corp. (MTG - Free Report) . Each one of these carries a Zacks Rank #2 (Buy) and beat their respective earnings estimate in the second quarter. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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