AIG's Restructuring Initiative Shows Potential - Analyst Blog

On Jun 27, we issued an updated research report on American International Group Inc. AIG. The successful streamlining of operations to control costs, along with business de-risking, strong ratings and capital flexibility attained with the divestment of ILFC should boost AIG's results ahead. However, intense competition and volatility in interest rates and currency pose near-term risks.

This Zacks Rank #3 (Hold) stock has delivered positive earnings surprises in all the last 4 quarters with an average beat of 16.7%. Although the company's first-quarter 2014 earnings topped the Zacks Consensus Estimate by about 12%, it was lower than the year-ago quarter figure by 9.7%.

AIG has also been incurring high catastrophe losses and restructuring charges, including loss from discontinued operations, which reduced operating earnings significantly in the past several quarters. Although the company's operational realignment indicates long-term synergies, the implementation costs may hamper margins in the upcoming quarters. Moreover, a weak interest rate environment continues to reduce returns on investment and equity.

Increasing Capital Flexibility

Nonetheless, AIG has divested redundant assets worth over $70 billion at attractive valuations since 2008. Adding to AIG's capital flexibility, credit profile and liquidity, the divestment of ILFC (the only major-most asset left for disposition at AIG)has enabled the company to get rid of liabilities worth $2.6 billion and focus on core insurance businesses.The deal is projected to have a positive impact on non-operating pre-tax gain worth $2.2 billion in second-quarter 2014, resulting in a book value accretion of $0.97 per share.

The company's aggressive liability management initiatives are also aiding improvements in operating cash flow and debt leverage. Going forward, we expect the company to benefit from its scale of operations, pricing improvements and disciplined expense management from the ongoing operational restructuring, thereby creating a more streamlined organization.

Overall, a balanced risk-reward balance in the near term caused some revision of estimates for 2014 and 2015 over the past 30 days. The Zacks Consensus Estimate for 2014 moved north by a cent to $4.39 per share, while the same for 2015 is pegged at $4.92, down 1 cent a share. On year-over-year basis, earnings are expected to fall by 3.7% in 2014 and then grow by 12.1% in 2015.

Key Picks in the Sector

Some better-ranked stocks in the insurance sector include Old Republic International Corp. ORI, AmTrust Financial Services Inc. AFSI and Radian Group Inc. RDN. All these stocks sport a Zacks Rank #1 (Strong Buy).