AIG’s Strategic Focus On AI And Digital Innovation Promises To Boost Profit Margins And Enhance Growth

Key Takeaways

• AIG's strategic focus on capital management and AI integration aims to enhance operational efficiencies and support sustained earnings growth.
  
• Initiatives like AIG Next and emphasis on specialty lines are expected to improve net margins and drive revenue growth in key segments.
  
• AIG's exposure to natural catastrophes, claims settlements, and changing reinsurance dynamics could pressure margins and limit growth opportunities.

Catalysts

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

• AIG's focus on capital management, including stock repurchases and dividends, is expected to enhance earnings per share (EPS) significantly by reducing the number of shares outstanding and returning value to shareholders. This could support future earnings growth.
  
• The company's investments in AI and digital strategies aim to improve underwriting and claims processes, potentially increasing operational efficiencies and improving net margins. The integration of GenAI to support underwriting could boost growth by prioritizing high-value business.
  
• AIG Next, the initiative aimed at achieving $500 million in savings by 2025, is expected to reduce operating expenses significantly across various segments, positively impacting net margins and profitability.
  
• The emphasis on strategic underwriting and reinsurance improvements, with AIG maintaining the lowest net retention among global competitors, positions the company well for sustained profitability in a volatile environment, enhancing future earnings stability.
  
• The company plans to grow organically with strong performance expected from specialty lines and international segments like energy and marine, driven by their historical leadership in these areas. This will likely boost revenue growth and contribute to AIG's ability to reach a 10% core operating ROE by 2025.

American International Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming American International Group's revenue will decrease by -18.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.4% today to 21.3% in 3 years time.
• Analysts expect earnings to reach $5.3 billion (and earnings per share of $10.59) by about November 2027, up from $3.8 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.5x on those 2027 earnings, down from 12.4x today. This future PE is lower than the current PE for the US Insurance industry at 13.5x.
• Analysts expect the number of shares outstanding to decline by 6.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.15%, as per the Simply Wall St company report.

American International Group Future Earnings Per Share Growth

Risks

• AIG faces significant risks from natural catastrophes, with industry losses from such events expected to exceed $125 billion in 2024. The increasing frequency and severity of such events can pressure underwriting income and negatively impact net margins.
  
• AIG has a substantial amount of claims settlements related to older accident years, which can lead to volatility in reserves and potential adverse development that could impact the company's earnings.
  
• The shift in reinsurance market dynamics, with primary insurers retaining a larger share of catastrophe losses, may increase AIG's exposure to future catastrophic events, potentially affecting net margins and overall profitability.
  
• AIG's decision to shift expenses from Other Operations into General Insurance could lead to margin pressure if these expenses are not offset by efficiency gains or increased revenue growth.
  
• Maintaining a disciplined approach to capital management and share repurchases may limit AIG's ability to capitalize on potential growth opportunities through reinvestment or acquisitions, potentially impacting future revenue streams and earnings.

Valuation

• The analysts have a consensus price target of $84.35 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 2027, revenues will be $25.0 billion, earnings will come to $5.3 billion, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $76.09, the analyst's price target of $84.35 is 9.8% higher.
  
• 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.