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How Bad Will the Effect of Weather be on AIG Q3 Earnings?

American International Group Inc.AIG is scheduled to report third-quarter 2017 results on Nov 2, after market close.

Last quarter, this company surpassed the Zacks Consensus Estimate for earnings by 27.5%. Also, earnings were up 33% year over year.

Better-than-expected earnings were driven by strong performance from the company's Consumer business partially offset by losses sustained by its Commercial business. Also, cost control efforts and shares bought back during the quarter aided the bottom line.

The company has a positive surprise history, having exceeded estimates in two of the last four quarters, with an average beat of 0.1%. This is depicted in the graph below:

American International Group, Inc. Price and EPS Surprise

American International Group, Inc. Price and EPS Surprise | American International Group, Inc. Quote

Let's Take a Look at the Factors Affecting Q3 Results

Weakness in Commercial Insurance Segment - The company's Commercial Insurance business has been suffering for the past many quarters from challenging market conditions. Management has undertaken actions to restore profitability in this segment by shifting its mix of business to the more profitable ones. This has led to a reduction in U.S. casualty exposure, shrinking the gross book by a third from 2015. While business portfolio repositioning has reduced operating risk, the segment's revenues continue to suffer from reduction in premium written from forgone business. The same is expected to be reflected in third-quarter results.

The segment's underwriting profitability is likely to suffer from nearly $3 billion of estimated catastrophe loss from hurricanes - Harvey, Irma, Maria and the earthquake in Mexico.

We expect the segment's profitability to suffer in the third quarter from high loss claims at a time when the segment's top line is already weighed down by challenging market conditions.

Lower Share Buyback - The company's newly appointed CEO has made a shift in its capital utilization strategy in an effort to scoop up more profits. Management now expects to utilize capital for possible acquisitions in international markets, personal and life lines, and domestic middle market as opposed to significant capital used for share repurchases till now.

Though the acquisitions to be made by the company will expand its business, these might not be immediately accretive to earnings. The bottom line will also be bereft of the support provided by significant buybacks till now. This might likely drain earnings in the third quarter.

Strong Consumer Segment - This business represents roughly half of the company's core equity and is a valuable source of earning stability. The company enjoys a leading market position across many products and distribution channels, which allow it to maintain profitability in evolving markets. We expect improved contribution from Group Retirement and the Life Insurance line of business.

In its Life Insurance sub-segment, the company recently introduced a new administrative platform and digital capabilities, revamped its product suite, and substantially exited its U.S. life career distribution channel, service agent channel, and subscale group benefits business. These steps were undertaken to enhance ROE from this line of business. The efforts were reflected in an increase in life insurance sales in the first half of 2017 and we expect to see further sales growth in the third quarter.

Earnings Whispers

Our proven model does not conclusively show that AIG is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here as you will see below.

Zacks ESP: AIG has an Earnings ESP of 0.00%. This is because the Most Accurate estimate of a loss of 83 cents per share is in line with the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks Rank: AIG carries a Zacks Rank #4. We caution against the Sell-rated stocks (#4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some companies worth considering as these possess the right combination of elements to beat estimates this quarter:

Intercontinental Exchange Inc. ICE will report third-quarter 2017 earnings results on Nov 2. The company has an Earnings ESP of +0.19% and a Zacks Rank #3. You can see the complete list of today's Zacks #1 Rank stocks here.

NRG Energy, Inc. NRG has an Earning ESP of +8.24% and a Zacks Rank #3. It will report third-quarter 2017 earnings results on Nov 2.

Cenovus Energy Inc. CVE has an Earning ESP of +40.00% and a Zacks Rank #3. It will report third-quarter 2017 earnings results on Nov 2.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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