AIG Stock Rises 12.1% YTD: Should Investors Hold or Fold?

In the year-to-date period, shares of American International Group, Inc. (AIG) have increased by 12.1%. While this growth is notable, it falls short compared to the multiline insurance industry, which has seen a 24% increase, and the S&P 500 Index, which has risen by 27.2%. Currently, AIG stock is down 6% from its 52-week high of $80.83.

When looking at AIG's peers, MetLife, Inc. has experienced a significant growth of 29.2%, while Marsh & McLennan Companies, Inc. has grown by 21.3% during the same timeframe.

Performance Comparison of AIG Stock YTD

As it stands, AIG trades at a premium valuation compared to its industry peers. The company's shares have a forward 12-month price-to-earnings (P/E) ratio of 11.57X, which is notably higher than its five-year median of 9.69X and the industry average of 9.48X. In contrast, MetLife and Marsh & McLennan currently sport forward 12-month P/E ratios of 8.90X and 24.6X, respectively.

This high premium valuation may reflect strong investor confidence in AIG's future. To assess whether this valuation is justified, it's essential to explore AIG's business operations and financial foundations.

Factors Driving AIG’s Growth

AIG’s growth strategy is supported by several elements: improved returns on investments, a growing premium base, and consistent expense management. The company has seen its investment income boosted by increasing revenues from fixed-maturity securities and alternative investments. In the third quarter, this metric rose by 13.7% compared to the previous year, reaching $973 million.

Moreover, AIG is reorganizing its operations by selling off non-core businesses to concentrate on its key insurance services. This includes significant actions like the deconsolidation of Corebridge Financial, Inc. and the divestment of Crop Risk Services and Validus Re. These changes aim to streamline AIG's focus on its General Insurance unit, manage portfolio risks, enhance cash liquidity, and speed up capital allocation.

The ongoing refinement of AIG's business mix, along with its proactive expense management and enhanced premium revenue, is expected to lead to an improved expense ratio. The AIG Next program is projected to yield annual savings of around $500 million.

AIG is also committed to returning capital to its investors. In 2023, the company dedicated $3 billion to share buybacks and disbursed $1 billion in dividends. The following year, it continued this trend by repurchasing $4.8 billion worth of shares within the first nine months and issuing $765 million in dividends. Additionally, AIG raised its quarterly dividend by 11% in May 2024. Such actions demonstrate confidence in its operational strength and a commitment to maximizing shareholder value.

These efforts position AIG well to navigate existing market challenges and pursue long-term growth.

Challenges Facing AIG Stock

Despite the positive outlook, AIG faces significant challenges due to its substantial debt levels. As of the third quarter, the company reported long-term debt totaling $9.89 billion, significantly surpassing its cash reserves, which stood at just $1.47 billion, down from $1.54 billion at the end of 2023. Furthermore, AIG’s net debt-to-capital ratio is considerably higher than the industry average.

AIG’s return on equity (ROE) also raises concerns, as it is currently at 8.63%, well below the industry average of 15.38%. This indicates a relative inefficiency in leveraging shareholders' capital to generate profits.

Current Earnings Estimates for AIG

Recent analyses suggest that the Zacks Consensus Estimate for AIG's 2024 earnings per share is projected at $5.12, marking a 1.2% decrease over the past 60 days. During this period, there were three downward revisions of estimates compared to one upward adjustment.

Nevertheless, AIG has exceeded earnings expectations in three out of its last four quarters, with an average surprise of 2.9%.

Should Investors Retain AIG Stock?

With the favorable conditions mentioned, AIG could be a worthy candidate for long-term investment portfolios. Presently, it trades below the Wall Street average price target of $84.72 per share, suggesting an upside potential of 11.53% from current levels.

Given AIG's improving operational mix, increasing returns on investments, and commitment to expense control, the company is well-positioned for sustained long-term growth. Therefore, maintaining a position in this Zacks Rank #3 (Hold) stock seems advisable. For new investors, it may be wise to monitor the situation and wait for a more favorable entry point, while also observing the company’s ongoing balance sheet enhancement initiatives.

AIG, Investors, Growth