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AIG Up 33% This Year After Dismal Run in 2018: What's Ahead?

Sapna Bagaria

American International Group, Inc.’s AIG stock is gaining ground on the back of a number of profitability-improvement measures effectuated over the past two years, which are now impacting its earnings.

The company’s earnings beat estimates in the first and the second quarter of 2019 after missing estimates in six straight quarters. Its performance aroused scepticism over its ability to turn around the underperforming business.

This pessimism also led to a 34% decline in the company’s share price in 2018 and 8.8% fall in 2017. However, in 2019, the stock has gained 33% year to date compared with its industry’s rise of 0.5%.

Since the beginning of 2018, American International has been focusing on addressing several critical areas, such as refining its approach to underwriting, reducing risk profile, overhauling reinsurance strategy to reduce volatility, making General Insurance business profitable and remediating challenged legacy businesses, and position itself strategically in the global insurance marketplace.

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The company has achieved quite a bit in its largest segment, General Insurance (contributing nearly 67% of total revenues in 2018), by posting an underwriting profit and a favorable combined ratio in the first half of 2019. This underwriting profit represents a significant milestone for AIG, and reflects the tremendous work taken up by management to improve underwriting fundamentals.

The company’s approach to reinsurance, which has dramatically reduced risk and volatility, onboard acquisitions and continuous expense discipline across General Insurance, is expected to drive the segment’s results. Management remains confident that the segment will continue to improve its financial performance and deliver underwriting profit for full-year 2019.

Along with growing its top line, the company has tightened its grip on expenses, which has aided its margins. It has also witnessed a decline in expense ratio, despite making investments in talent, business process and infrastructure to support its long-term profitable growth objectives.

AIG’s continuous focus on strengthening its underwriting fundamentals, the changing mix of business and the focus on inorganic growth should pay off. Recently the company completed the buyout of Validus and Glatfelter. Validus adds an attractive bundle of businesses, including a reinsurance platform (Validus Re), an insurance-linked securities asset manager (AlphaCat), a Lloyd’s syndicate (Talbot), a specialty US small commercial excess and surplus underwriting team (Western World), and Crop Risk services, which focuses on the North American crop insurance market.

The stock carries a Zacks Rank #3 (Hold).  Some better-ranked stocks worth considering are James River Group Holdings, Ltd. JRVR, Assurant Inc. AIZ and Radian Group, Inc. RDN. While James River Group sports a Zacks Rank #1 (Strong Buy), Assurant and Radian Group carry a Zacks Rank #2 (Buy).

James River beat estimates in three of the four reported quarters with an average positive surprise of 2.62%. Assurant and Radian beat estimates in each of the four reported quarters with an average positive surprise of 21.75% and 10.10%, respectively.

You can see the complete list of today’s Zacks #1 Rank stocks here.


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