New Partnerships With Blackstone And Palantir Will Improve Operational Efficiency

Key Takeaways

• Initiatives like AIG Next and AI partnerships are enhancing operational efficiency and revenue, positioning AIG for strong future growth.
  
• Strategic collaborations and disciplined capital management are strengthening AIG’s financial structure, increasing shareholder value and earnings prospects.
  
• The company's earnings and margins face challenges from increased catastrophe risks, regulatory constraints, strategic divestitures, and substantial investments in generative AI.

Catalysts

Offers insurance products for commercial, institutional, and individual customers in North America and internationally.

• AIG's focus on expense management through initiatives like AIG Next, which achieved $450 million in run-rate savings, is expected to lead to further operational efficiencies and bolster net margins for 2025.
  
• The deconsolidation of Corebridge Financial has resulted in a more streamlined business for AIG, positioning the company for better revenue growth and an improved capital structure due to reduced complexity.
  
• AIG's deployment of generative AI and partnerships with tech companies like Palantir and AWS for underwriting assist, aims to drive business growth by enhancing data analytics capabilities, thereby potentially increasing revenue streams.
  
• The launch of Syndicate 2478 at Lloyd’s, in partnership with Blackstone, is set to strengthen AIG’s reinsurance strategy and generate additional fee income, positively impacting earnings.
  
• AIG’s disciplined capital management, including share repurchases and dividend increases, is expected to contribute to improved earnings per share and shareholder value.

American International Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming American International Group's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.1% today to 14.6% in 3 years time.
• Analysts expect earnings to reach $4.5 billion (and earnings per share of $8.94) by about March 2028, up from $2.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.8x on those 2028 earnings, down from 22.0x today. This future PE is lower than the current PE for the US Insurance industry at 13.2x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.41%, as per the Simply Wall St company report.

American International Group Future Earnings Per Share Growth

Risks

• The impact of recent California wildfires underscores escalating risks and an elevated catastrophe landscape, which could increase loss ratios and impact overall net margins.
  
• The realignment and divestitures, such as the sale of Corebridge and Crop Risk Services, might reduce AIG's revenue streams, impacting future earnings potential.
  
• Increasing reinsurance retentions mean primary insurers like AIG may retain more catastrophe risks, which can lead to volatile underwriting results and potentially reduce net margins.
  
• The evolving regulatory environment, especially in critical risk areas like California, could impose constraints leading to increased operational costs and affect earnings.
  
• The shift towards deploying generative AI technologies, while potentially beneficial long-term, could present short-term execution risks and require significant investment, impacting net margins.

Valuation

• The analysts have a consensus price target of $84.123 for American International Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $96.0, and the most bearish reporting a price target of just $75.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $30.6 billion, earnings will come to $4.5 billion, and it would be trading on a PE ratio of 10.8x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $81.52, the analyst price target of $84.12 is 3.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.