Forget AIG, Buy These 3 Value-Added Insurance Stocks Instead
Zacks Investment Research | Nov 27, 2017 06:27AM ET
Multi-line insurer American International Group Inc. (NYSE:AIG) has lately been witnessing downward revisions. The stock has seen the Zacks Consensus Estimate for current-year earnings per share being revised a whopping 44.6% downward to $2.76 over the last 60 days. Also for 2018, the consensus mark has moved 7.4% south to $4.98 over the same time frame.
The stock carries a Zacks Rank #5 (Strong Sell) and has an unimpressive Value Score of D. Our research shows that stocks with a Value Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best upside potential. Hence, the stock under discussion does not look promising at present.
Further, shares of AIG have underperformed the industry so far this year. The stock has lost 9.3% versus the industry’s 8.7% gain.
What’s Bothering AIG?
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 also had a two-year plan (formed in January 2016) to improve the segment’s profitability but with significant loss incurred of late, it is unlikely to achieve the goal.
Also unfavorable reserve development from past several years continues to impede underwriting results at AIG. The sluggishness further adds to the uncertainty and questions the company’s underwriting discipline and claims paying ability. Also, the company’s nature of operations exposes it to weather-related losses. Catastrophes have historically imparted volatility to the company’s earnings and will be a headwind going forward.
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 life lines segments plus investing in the domestic middle market as opposed to its hitherto usage of capital resource for share repurchases.
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Though on one hand, the company’s forthcoming buyouts will expand its business but those might not be accretive to earnings immediately. On the other, the bottom line will be bereft of the support provided by effective buybacks till now. This might likely decrease earnings in the coming quarters.
Further, AIG’s trailing 12-month return on equity (ROE) undermines its growth potential. The company’s 6.1% ROE compares unfavorably with the ROE of 7.7% for the industry, reflecting that it is inefficient in using shareholder funds.
Picking Favorable Insurance Stocks
While AIG doesn’t appear to be an attractive pick right now, there are a few other insurance stocks that have a better Zacks Rank and a potent Value Score to emerge as best bets. Also, these companies have outperformed the industry’s rally so far this year.
With the help of the .
Kingstone Companies, Inc (NASDAQ:KINS) carries a Zacks Rank #2 and has a Value Score of B. The company’s current-quarter earnings are expected to grow 11.5% year over year. Further, shares of the company have jumped 39.3% year to date.
Radian Group Inc. (NYSE:RDN) is a Zacks #2 Ranked player and has a Value Score of B. The stock has seen the Zacks Consensus Estimate for current-quarter earnings being pegged at 8.5% year-over-year growth. Further, shares of the company have rallied 16.2% year to date.
Third Point Reinsurance Ltd. (NYSE:TPRE) has a Zacks Rank of 2 and a Value Score of B. The company’s current-quarter earnings are anticipated to skyrocket 265.2% year over year. Further, shares of the company have surged 45% year to date.
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