What Has Driven The 40% Jump In AIG’s Stock Price This Year?

AIG: American International Group logo
American International Group

American International Group Inc. (NASDAQ:AIG) is a leading provider of life insurance and retirement solutions with global presence in nearly 80 countries. So far this year, AIG’s stock has swelled around 40% – jumping from below $40 in January to around $56 over recent weeks. We detail the reasons behind the 40% gain in AIG’s stock price this year in an interactive dashboard, parts of which are highlighted below.

Trefis estimates AIG’s valuation to be around $59 per share (10% above the current market price) after incorporating changes based on AIG’s earnings release earlier this month. Additionally, you can see more Trefis data for Insurance companies here.

AIG’s shares have gained since the beginning of the year from a favorable change in revenue and margins, even as its share count has fallen.

  • Revenues are expected to increase by 4% from $47.4 billion in 2018 to $49.3 billion in 2019
  • We expect the net interest margin to increase by 840 bps from 0% in 2018 to 8.4% in the current year.
  • Shares outstanding are likely to decrease by 2% from 898.4 million in 2018 to 881.6 million in 2019 due to ongoing share repurchases
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Note: EPS in 2018 was -$0.01, because of which the P/E multiple for the year was not meaningful. However, we believe a P/E multiple of 11.8x is appropriate for 2019.

#1 AIG’s Revenues fell 4.3% to $47.4 billion in 2018 primarily because of a 9% dip in its Life & Retirement segment revenues

  • Although total revenues fell in the previous year, AIG has reported strong revenue growth over the first half of 2019. We expect Total Revenues to increase by 4% in 2019 driven by a 3% increase in General Insurance revenues and a 9% jump in Life & Retirement segment revenues.
    • General Insurance revenues are expected to increase by 3% from $30.2 billion in 2018 to $31.1 billion in 2019.
    • Life & Retirement revenues would top the growth chart with 9% y-o-y increase, from $14.1 billion in 2018 to $15.4 billion in 2019 (detailed in the next section)
    • Legacy Portfolio & Other segment revenues have fallen steadily over the years as AIG unwinds its legacy investments. We expect these revenues to decrease from $3.1 billion in 2018 to $2.8 billion in 2019.
  • Overall, Total Revenue would increase from $47.4 billion in 2018 to $49.3 billion in 2019.

#2 Net Income should increase sharply to $4.1 billion in 2019 after 2 consecutive losses over 2017 and 2018, as the net income margin normalizes from -12% in 2017 to 8.4% in 2019.

  • This will be driven by expected reduction in General Operating and other expenses followed by lower policyholder benefits and losses incurred.
  • A key reason for low Net Income figures in 2017 and 2018 was a very high effective tax rate, which is expected to normalize to  20-21% in 2019.
  • Growth in Net Income coupled with a decrease in outstanding shares is expected to increase EPS figure to $4.69 for full-year 2019.

Conclusion: The 40% growth in AIG’s stock since the beginning of the year was driven by

  • Expected revenue growth of 4% for the current year, primarily due to gains in Life & Retirement segment
  • Sharp improvement in the net income margin over the first 2 quarters – pointing to a figure of 8.4% for full-year 2019 (up from 0% in 2018_
  • A slight reduction in shares outstanding

Per Trefis, AIG’s Revenues (shows key revenue components) are expected to cross $49.3 billion in 2019 – leading to an EPS of $4.69 for the year. This EPS figure coupled with a P/E multiple of 12.5x, works out to a price estimate of $59 for AIG’s stock (shows cash and valuation analysis), which is 10% more than the current market price.

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