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AIG Benefits From Divestitures, Enhanced Retirement Solutions

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American International Group, Inc. (AIG - Free Report) is well-poised to benefit on the back of divestitures, which enables it to focus on high growth areas. The company also undertakes several cost control efforts in a bid to drivemargins.

The expected long-term earnings growth rate is 10%, better than the industry’s average of 6.2%.

Factors Driving Performance

The multi line insurer continues to benefit on the back of its constant efforts to streamline and restructure operations. The company has undertaken divestitures to get rid of non-core businesses with lower returns and instead focus on core businesses generating higher return in equity. By selling Fortitude Re last month, AIG has let go its legacy liability related to the insurance portfolio, which includes run-off management solutions for long-dated, complex risk policies. A reduction of legacy liability will also improve the company’s risk-adjusted capital ratio.

Moreover, AIG has undertaken several buyouts over the years for improved product offerings. The company intends to utilize capital for investing in domestic middle market and tapping buyout opportunities in the international markets.

Further, the company has been striving to offer enhanced products in a bid to provide long-term retirement benefits to retirees through its business — AIG Life & Retirement. Last month, AIG rolled out index annuity —AQR DynamiQ Allocation Index, which intends to create customized portfolios by expanding across multiple asset classes and geographic regions. In May, the same business of AIG had collaborated with Annexus to introduce another index annuity—X5 Advantage. These launches highlight the company’s commitment to launching index annuities, as they generally provide a steady and lifetime source of income for retirees.

Furthermore, we believe the company’s cost control efforts in the form of reduction in headcount, freezing of pension plans and divestiture of underperforming units has led to a decline in its general operating expenses (GOE) over the years. Notably, GOE have also reduced in the first-quarter 2020. Such stringent cost control measures have helped the company to expand operating margins, which improved 190 basis points (bps) sequentially.

Additionally, the company’s effective capital deployment measures via share repurchases are commendable.

However, shares of this Zacks Rank #3 (Hold) multi line insurer have lost 43.2% on a year-to-date basis compared with the industry’s decline of 24.8%. We remain concerned about the company’s high debt levels. It remains substantially higher than the company’s liquidity position thereby making it difficult for AIG to service its debt.

 

Nevertheless, we believe that the company’s strong fundamentals are likely to drive its shares going forward.

Stocks to Consider

Some better-ranked stocks in the insurance space include Fidelity National Financial, Inc. (FNF - Free Report) , EverQuote, Inc. (EVER - Free Report) and Kemper Corporation (KMPR - Free Report) . While Fidelity National sports a Zacks Rank #1 (Strong Buy), EverQuote and Kemper carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Fidelity National, EverQuote and Kemper have a trailing four-quarter positive earnings surprise of 21.13%, 86.67% and 16.25%, respectively.

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