AIG (NYSE:AIG) is looking again to subprime mortgage-backed securities after the insurance company was bailed out by the U.S. Treasury Department in 2008, following the financial crisis that was started by subprime mortgages. AIG is now looking to increase its returns from investments as conditions in Europe have reduced bond yields. Other insurance companies such as MetLife (NYSE:MET), Hartford Financial (NYSE:HIG) and Manulife Financial (NYSE:MFC) have also been similarly affected by the European debt crisis.
Alea Jacta Est- The Die Is Cast
A decline in natural disasters from last year allowed AIG to report an operating income of $1.0 billion in the last quarter, (see AIG Earnings Climb Due To Fewer Disasters This Year) as the company continues repurchase its shares from the U.S. Department of Treasury. Investment by the company in non- government-guaranteed residential and commercial-mortgage backed securities holdings which offer high returns with increased liquidity risks has increased to $28.4 billion and we expect this to pay off, as property values across the U.S. continue to fall and mortgage delinquency rates fall to pre-2008 levels. The investment of insurance premiums account for 35% of our price estimate for AIG’s stock.
AIG has purchased commercial mortgage-backed securities called Maiden Lane III from a Federal Reserve Bank. This security was created in 2008, as a part of the bailout initiative for the company and will be used by the company for capital management.
We presently have a price estimate of $19.72 on AIG’s stock, about 40% below its current market price, which is slightly conservative as lower interest rates in the U.S. have led to an increase in insurance prices over the last few months. We will keep a close eye on AIG, as it continues to divest its stake in AIA Group, a Hong Kong based insurer and also its aircraft-leasing operations. Property and casualty is the division contributing highest (52%) to AIG’s value, and we expect it to continue to perform well as it did in the first quarter of 2012; however, this is subjective to rather unpredictable weather conditions across the globe and will be closely monitored by us.