Will Cat Loss Mar American International (AIG) Q2 Earnings?

American International Group, Inc. (NYSE:AIG) is scheduled to report second-quarter earnings results after the market close on Aug 2.

Last quarter, this multiline insurer missed the earnings estimate by 34.34%. The company doesn’t have a flattering earnings surprise record. It missed the consensus estimate in three out of the past four quarters, with the average miss being 23.04%. Will American International Group miss estimates this quarter as well?

2Q16 Flashback

Earnings will suffer from catastrophe losses (from the Japanese/Ecuador earthquakes and Texas floods) of $200–$300 million across its commercial and consumer businesses.

Net premium written are expected to be down due to an increase in use of reinsurance along with exits from unprofitable lines.

The quarter’s earnings might also see a shortfall due to lower returns from its alternative investments. Its corporate segment which houses the Direct Investment Book and Global Capital Markets (GCM) investments may also incur losses.

We, however, expect bottom line to be cushioned from lower operating expenses by the company’s initiatives taken to control expenses. Operating expenses declined by $140 million in the first quarter and we expect further reduction on this front.

We also expect higher earnings within the commercial lines business which should see improvement from initiatives such as reinsurance and business mix shift.

Good growth in U.S. life sales reflecting the evolution of the company’s distribution strategy and further development of the company’s independent distribution channel should also lead to an earnings upside.

Share buyback will further boost earnings per share. It will be interesting to watch whether all these positives translate into an earnings beat.

Earnings Whispers

Our proven model does not conclusively show that American International Group will likely beat the Zacks Consensus Estimate this time around. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) for this to happen. But this is not the case here as elaborated below.

Zacks ESP: American International Group's Most Accurate estimate is pegged at 80 cents per share, which is way below the Zacks Consensus Estimate of 91 cents. The Earnings ESP is thus -12.09%.

Zacks Rank: American International Group carries a Zacks Rank #3. Though this increases the predictive power of the ESP, the company's negative ESP makes surprise prediction difficult.

Stocks to Consider

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

The Allstate Corporation (NYSE:ALL) has an Earnings ESP of +7.55% and carries a Zacks Rank #3. The company is slated to report second-quarter earnings results on Aug 3.

Prudential Financial, Inc. (NYSE:PRU) has an Earnings ESP of +0.40% and carries a Zacks Rank #3. The company is slated to report second-quarter earnings results on Aug 3.

Sun Life Financial Inc. (TO:SLF) has an Earnings ESP of +1.47% and carries a Zacks Rank #2. The company is expected to report second-quarter earnings results on Aug 10.

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