Over the last six months, AIG’s shares have sunk to $79.39, producing a disappointing 5.9% loss - a stark contrast to the S&P 500’s 8.4% gain. This may have investors wondering how to approach the situation.

Is there a buying opportunity in AIG, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Do We Think AIG Will Underperform?

Even with the cheaper entry price, we’re sitting this one out for now. Here are three reasons we avoid AIG, plus one stock we’d rather own.

1. Revenue Spiraling Downwards

In general, insurance companies earn revenue from three primary sources. The first is the core insurance business itself, often called underwriting and represented in the income statement as premiums earned. The second source is investment income from investing the “float” (premiums collected upfront not yet paid out as claims) in assets such as fixed-income assets and equities. The third is fees from various sources such as policy administration, annuities, or other value-added services.

Over the last five years, AIG’s demand was weak and its revenue declined by 9.1% per year. This wasn’t a great result and signals it’s a low quality business.

2. 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:

• Gross premiums - what’s ceded to reinsurers as a risk mitigation and transfer strategy

AIG’s net premiums earned has declined by 4.7% 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.

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

AIG falls short of our quality standards. Following the recent decline, the stock trades at 1× forward P/B (or $79.39 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better stocks to buy right now. We’d recommend looking at a top digital advertising platform riding the creator economy.

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