American International Group (NYSE: AIG) is scheduled to report its fiscal Q3 2021 results on Thursday, November 4. We expect AIG to miss the revenue and earnings expectations. The insurance giant topped the consensus estimates in the last quarter, with revenues increasing by 14% y-o-y to $10.7 billion. It could be attributed to a 9% y-o-y increase in the net investment income, coupled with a 7% growth in premiums. Further, total net realized losses decreased from -$2.3 billion to -$1.9 billion in the quarter. In addition to this, the adjusted net income improved from -$7.9 billion to $91 million in the quarter. We expect the top-line to follow the same pattern in the third quarter.
Our forecast indicates that American International Group’s valuation is $57 per share, which is 5% below the current market price of around $60. Our interactive dashboard analysis on American International Group’s Earnings Preview has more details.
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(1) Revenues expected to be just below the consensus estimates
American International Group’s revenues for full-year 2020 were $43.7 billion – 12% below the year-ago period. It was driven by a 7% y-o-y decline in the premiums and net investment income (NII).
- AIG generates more than 60% of the total revenues from insurance premiums. The premiums figure suffered a 7% drop to $28.5 billion in 2020, primarily due to an 11% decline in the general insurance segment, partially offset by a 22% jump in the total life & retirement division. The general insurance, which contributes around 85% of the total premiums, was down due to the impact of the Covid-19 crisis, especially in the travel category and personal & commercial lines. The same trend continued in the first quarter of 2021. However, the total premiums improved in the second quarter driven by an 8% growth in the general insurance segment. We expect the same trend to continue in the third quarter as well.
- The net investment income (NII) is very important for the profitability of any insurance company and AIG is no exception. The company derives close to 30% of the total revenues from the NII, which suffered 7% y-o-y to $13.6 billion in 2020. This was mainly due to low investment yields. That said, the revenue stream improved in the first and second quarters of 2021 – up 25% y-o-y for the first half of the year. It was primarily because of higher returns from the private equity portfolio, partially offset by lower base portfolio income resulting from decreased reinvestment rates on the base portfolio. We expect the same momentum to continue in the third quarter.
- Overall, we expect AIG’s revenues to touch $66.6 billion for FY2021.
Trefis estimates AIG’s fiscal Q3 2021 revenues to be around $11.33 billion, 2% below the $11.56 billion consensus estimate. We expect the growth in the general insurance division and net investment income to drive the third-quarter results.
Moving forward, the premiums are likely to improve in FY2021. Further, the investment yields on the base portfolio, though expected to improve in the year, are still likely to remain below the pre-Covid-19 levels for some more time. Our dashboard on American International Group’s revenues offers more details on the company’s operating segments along with our forecast for the next two years.
2) EPS is likely to miss the consensus estimates
AIG Q3 2021 adjusted earnings per share (EPS) is expected to be $0.68 per Trefis analysis, missing the consensus estimate of $0.90. The company reported an adjusted net income of -$6 billion in 2020 – down from $3.3 billion in the year-ago period. It was because of lower revenues and higher expenses as a % of revenues. Notably, the expense figure rose due to a one-time net loss on the sale of the divested business of $8.5 billion in the year. Further, the profitability numbers improved in the first quarter of 2021 due to lower operating expenses as a % of revenues (down from 82% to 67%). The expenses % again increased in the second quarter to 99% due to higher policyholder benefits and losses incurred. We expect the expenses to follow the same trend in the third quarter.
Going forward, we expect AIG’s net income margin to significantly improve in FY2021, leading to an adjusted net income of $3.4 billion. This will likely result in an EPS of $4.00.
(3) Stock price estimate 5% lower than the current market price
We arrive at American International Group’s valuation, using an EPS estimate of around $4.00 and a P/E multiple of just above 14x in fiscal 2021. This translates into a price of $57, which is 5% below the current market price of approximately $60.
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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