American International Group (NYSE: AIG) is scheduled to report its fiscal Q1 2021 results on Thursday, May 6 (after the market closes). We expect American International Group to top the revenue estimates, while its earnings will likely remain below expectations. The insurance giant’s fourth-quarter 2020 results were a mixed bag as well, with the company outperforming the revenue expectations and missing the earnings consensus. American International Group’s full-year 2020 revenues decreased by 12% on a year-on-year basis, mainly due to lower premiums and a drop in net investment income. The company’s premiums primarily suffered in the general insurance segment due to the impact of the Covid-19 crisis. Similarly, the net investment income was down due to lower investment yields. Notably, the impact of weak growth in general insurance was partially offset by a 6% y-o-y increase in the life and retirement unit driven by higher premiums in the institutional markets sub-segment. That said, the net investment income saw some improvement in the second half of the year driven by some recovery in the economic conditions. We expect the same trend to drive the first-quarter FY2021 results, as well.
Our forecast indicates that American International Group’s valuation is $44 per share, which is 10% below the current market price of around $49. Look at our interactive dashboard analysis on American International Group’s pre-earnings: What To Expect in Q1? for more details.
(1) Revenues expected to be ahead of consensus estimates in Q1
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Trefis estimates American International Group’s fiscal Q1 2021 revenues to be around $11.56 billion, 5% above the $10.98 billion consensus estimate. AIG’s revenues of $43.7 billion for the full year 2020 were 12% below the 2019 figure. This could be attributed to two factors – first, total premiums decreased by 7% y-o-y mainly due to an 11% drop in general insurance premiums; second, net investment income declined by 7% y-o-y due to the impact of the lower investment yields. The general insurance premiums suffered due to the impact of the Covid-19 crisis in the travel category and personal & commercial lines, followed by the higher ceded premiums. Further, the investment yields have decreased in 2020 due to the lower interest rate environment. That said, the impact of the lower yields was somewhat offset by the growth in invested assets. Also, the company witnessed a 6% y-o-y increase in its life and retirement revenues, driven by a 26% growth in the institutional markets sub-segment. We expect the recovery in net investment income and premiums to drive first-quarter FY2021 results.
The general insurance premiums are unlikely to see significant growth in FY2021, as the travel category and certain personal and commercial line products will likely remain under pressure due to the impact of the Covid-19 crisis. Further, the lower investment yields are likely to stay for some time. However, the growth in invested assets will likely offset some of its negative effects, benefiting the net investment income. Overall, AIG’s revenues are likely to touch $46.2 billion in FY2021. Our dashboard on American International Group’s revenues offers more details on the company’s segments.
2) EPS likely to miss the consensus estimates
American International Group’s Q1 2021 adjusted earnings per share (EPS) is expected to be $0.85 per Trefis analysis, almost 12% below the consensus estimate of $0.97. AIG’s profitability figures recorded a steep decline in 2020 – adjusted net income dropped from $3.3 billion to -$5.9 billion. It reduced the EPS figure from $3.74 to -$6.88. This could be attributed to an increase in operating expenses as a % of revenues from 89.4% to 116.7%, mainly due to higher policyholder benefits and losses incurred and a significant jump in net loss on sale of the divested business. That said, the net income margin has seen some improvement over the last two quarters and we expect the same trend to continue in FY2021 Q1 results.
American International Group’s adjusted net income margin is likely to recover from -13.7% in 2020 to 5.7% in FY2021, primarily due to lower operating expenses. Overall, it will enable AIG to report an EPS of around $3.10 in the current year.
(3) Stock price estimate 10% lower than the current market price
Going by our American International Group’s valuation, with an EPS estimate of $3.10 and a P/E multiple of just above 14x in fiscal 2021, this translates into a price of $44, which is 10% below the current market price of around $49.
Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year
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