AIG turns bearish on missing Q3 earnings estimates

Anticipating a turnaround in the operations, on October 10, we had suggested purchasing a one touch call option in the stock of American International Group Inc. (NYSE: AIG).

We had also advised to select a target price less than $63. Last week, following the fiscal 2016 third-quarter results, the shares of the insurance giant hit a high of $62.30. The company reported a swing to profit in the third-quarter, compared to last year.

However, now, we have a bearish view of the stock due to the following reasons.

The New York based insurer, with an employee count of about 64,000 people, reported a return to profit of $462 million, or $0.42 per share, in Q3 2016, compared to a net loss of $231 million, or $0.18 per share, in Q3 2015. AIG reported revenues of $12.85 billion for the quarter ended September 2016.

AIG

The third-quarter operating income was $1.097 billion, up 59% from $691 million in the similar quarter last year. The Q3 2016 operating income on a per share basis was $1, up 92.3% from $0.52 per share in the corresponding period of 2015, but below the Wall Street analysts’ estimates of $1.21 per share.

In the Commercial Insurance segment, net premiums written declined 17% y-o-y to $4.357 billion. The Consumer Insurance segment reported a 5% y-o-y decrease in operating revenues to $2.084 billion. The Personal Insurance segment posted 3% y-o-y decline in the net premium written to $2.919 billion. The total operating revenues increased 5% y-o-y to $1.662 billion in the Life Insurance segment. Three out of four segments did not fare well compared to similar period of last year.

The company’s portfolio includes more than $100 billion worth mortgage and real-estate holdings. If the US Fed raises interest rates, then the precise impact on AIG is still unknown. Another argument in favour of AIG is that the share price is trading at a deep discount to book value. This is justifiable if there is a clear estimate of money reserved for losses. However, it remains under reserved in the case of AIG. Thus, an investor will not be convinced when there is a buy recommendation based on book value. The trailing P/E ratio of the company is about 57.79 – certainly high for a company which was at the core of the mortgage crisis. Thus, fundamentally, the stock can be expected to remain bearish in the current quarter.

The price chart shows that the stock has hit a resistance at 62. The stochastic oscillator, with a reading above 80, reflects an overbought scenario. Thus, we can anticipate a minor correction in the share price.

Based on the forecast, a binary trader can invest in a one touch put option to reap considerable gains in a short span of time. The target price for the put option should be around $55. Likewise, the put option should remain valid until the end of the first-week of December.