3 Reasons AIG is Risky and 1 Stock to Buy Instead

AIG currently trades at $80.29 per share and has shown little upside over the past six months, posting a small loss of 3%. The stock also fell short of the S&P 500’s 6.5% gain during that period.

Is now the time to buy AIG, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Do We Think AIG Will Underperform?

We're swiping left on AIG for now. Here are three reasons why AIG doesn't excite us and a stock we'd rather own.

1. Declining Net Premiums Earned Reflect Weakness

When insurers sell policies, they protect themselves from extremely large losses or an outsized accumulation of losses with reinsurance (insurance for insurance companies). Net premiums earned are therefore net of what’s ceded to reinsurers as a risk mitigation and transfer strategy.

AIG’s net premiums earned has declined by 5.5% annually over the last five years, much worse than the broader insurance industry. A silver lining is that policy underwriting outperformed its other business lines.

2. Recent EPS Growth Below Our Standards

Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.

AIG’s EPS grew at a weak 2.6% compounded annual growth rate over the last two years. On the bright side, this performance was higher than its 2.4% annualized revenue declines and tells us management adapted its cost structure in response to a challenging demand environment.

3. Substandard BVPS Growth Indicates Limited Asset Expansion

For insurers, book value per share (BVPS) is a vital measure of financial health, representing the total assets available to shareholders after accounting for all liabilities, including policyholder reserves and claims obligations.

Disappointingly for investors, AIG’s BVPS grew at a tepid 8.3% annual clip over the last two years.

Final Judgment

We cheer for all companies serving everyday consumers, but in the case of AIG, we’ll be cheering from the sidelines. With its shares underperforming the market lately, the stock trades at 1× forward P/B (or $80.29 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

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