[Updated 02/25/2021] American International Group Update
American International Group stock (NYSE: AIG) has gained 135% since the March 23 lows of the last year and at its current price of $45 per share, it is marginally above its fair value of $44 – Trefis’ estimate for American International Group’s valuation. Its recently released fourth-quarter results were a mixed bag. While the company surpassed the consensus estimates for revenues, its earnings were below the mark. It reported total revenues of $9.7 billion in the quarter – down by 18% y-o-y. This decrease could be attributed to a drop in net realized capital gains (losses) from -$255 million in Q4 2019 to -$2.3 billion in Q4 2020. Further, total earned premiums decreased by 6% on a year-on-year basis, mainly due to a 55% decrease in North America’s personal insurance premiums.
The insurance giant reported $43.7 billion in revenues for the full-year 2020 – around 12% lower than the 2019 figure. It was primarily driven by a 7% drop in earned premiums and a similar decline in net investment income. The company derives more than 80% of its insurance premiums from the general insurance segment, which reported an 11% y-o-y decrease. This decline was majorly due to the impact of the Covid-19 crisis in the travel category and personal & commercial lines, followed by the higher ceded premiums. The net investment income is very important for the profitability of any insurance company, which suffered in 2020 due to the challenging interest rate environment. That said, a low-interest-rate environment is likely to remain for some time. Further, the premiums, though expected to improve, are unlikely to see a major jump in the current year. We expect the above factors to enable American International Group’s revenues to touch $46.2 billion in FY2021. Additionally, the net income margin is likely to improve due to lower policyholder benefits and losses incurred, leading to an EPS of $3.10 for FY2021. This coupled with a P/E multiple of around 14x, will lead to the valuation of $44.
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[Updated 11/23/2020] American International Group Stock Is Fairly Priced
American International Group stock (NYSE: AIG) has doubled since the March bottom and at its current price of $39 per share, it is marginally above its fair value of $38 – Trefis’ estimate for American International Group’s valuation. The insurance giant recently released its third-quarter results, outperforming the consensus earnings estimate. However, it missed the revenue estimate as it has done over the last three quarters. AIG reported total revenues of $10.2 billion in Q3, down by 21% y-o-y. This could be attributed to a drop in net realized capital gains (losses) from $929 million in Q3 2019 to -$1.12 billion in Q3 2020. On a similar note, total premiums were down by 12% on a year-on-year basis.
We expect the company to report $44.9 billion in revenues for 2020 – around 10% lower than the previous year’s figure. Our forecast stems from our belief that the economy is likely to see some improvement in the last quarter, improving the total premiums and net investment income over the coming months. However, the net income for the year is expected to suffer due to higher operating expenses, reducing the EPS figure to $2.53 for FY2020. American International Group’s revenues are expected to further decline to $44.8 billion in FY2021, mainly driven by lower life & retirement revenues. Despite this, the net income margin is likely to improve due to lower policyholder benefits and losses incurred, leading to an EPS of $4.47 for FY2021. This coupled with a P/E multiple of around 9x, will lead to the valuation of $38.
[Updated 8/31/2020] American International Group Stock Has A 30% Upside
American International Group stock (NYSE: AIG) lost more than 63% – dropping from $52 at the end of 2019 to around $19 in late March – then spiked 50% to around $29 now. Despite the recent rally, the stock remains 44% below its level at the beginning of the year.
There were 2 reasons for this: The Covid-19 outbreak and economic slowdown meant that market expectations for 2020 and the near-term consumer demand plummeted. As the company is heavily dependent on insurance premiums and income from investment of these premiums, this could harm its top line due to lower premiums and expected drop in investment yields. However, the multi-billion-dollar Fed stimulus in late March helped arrest the negative market sentiment, which is also evident from the stock recovery after that point.
But this isn’t the end of the story for American International Group’s stock
Trefis estimates American International Group’s valuation to be around $37 per share – about 30% above the current market price – based on an upcoming trigger explained below and one risk factor.
The trigger is an improved trajectory for American International Group’s revenues over the second half of the year. We expect the company to report $44.8 billion in revenues for 2020 – around 10% lower than the figure for 2019. Our forecast stems from our belief that the economy is likely to improve in Q3. This is also substantiated from the recently released consumer spending data in the U.S which suggests an m-o-m growth of 8.5% in May followed by 5.6% m-o-m in June. If the trend continues in the coming months, it is likely to improve the net premium figure which was expected to suffer as customers and businesses were more focused on the short term. Further, income from investment of insurance premiums – which is very critical for its profitability – has improved due to the recent improvement in the securities market. This, in turn, would benefit the revenue trajectory over the coming months. The net income for the year is expected to drop to $2.3 billion – down 31% y-o-y, reducing the EPS figure to $2.69 for FY2020.
Thereafter, American International Group’s revenues are expected to marginally decline to $44.2 billion in FY2021, mainly driven by a slight drop in the life and retirement segment. Further, the net income margin is likely to improve to the FY 2019 level, leading to an EPS of $3.53 for FY2021.
Finally, how much should the market pay per dollar of American International Group’s earnings? Well, to earn close to $3.53 per year from a bank, you’d have to deposit around $390 in a savings account today, so about 110x the desired earnings. At American International Group’s current share price of roughly $30, we are talking about a P/E multiple of just below 9x. And we think a figure closer to 11x will be appropriate.
That said, insurance is a risky business right now. Growth looks less promising, and near-term prospects are less than rosy. What’s behind that?
American International Group is an insurance giant with around $390 billion in identifiable assets between its life & retirement and group insurance segments (as per FY 2019 data). The company drives around 25% of its total revenues from income generated by the investment of insurance premiums. Hence, its business model is very sensitive toward changes in investment yields. While the S&P 500 index is on a growth trajectory (up 55%) since the March bottom, any further destabilization in the economic condition or an unexpected jump in the Covid-19 case count can reverse the momentum and could negatively impact AIG’s top line.
The same trend is visible across American International Group’s peer – Prudential Financial. Its revenues are also likely to suffer in FY2020 due to lower premiums and a drop in investment income. This would explain why Prudential Financial stock currently has a stock price of over $69 but looks slated for an EPS of around $10.09 in FY2021.
Although American International Group stock may not be attractive, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for salesforce.com Inc vs. Fiserv shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.