How Can Brexit Impact AIG?

+3.51%
Upside
75.34
Market
77.98
Trefis
AIG: American International Group logo
AIG
American International Group

With the United Kingdom voting to end its membership in the European Union last week, the U.K and potentially the entire E.U. are facing significant economic uncertainty. This has led some investors to increasingly shift to relatively safer instruments such as government bonds in developed countries, which is causing bond prices to rise and yields to decline.

This has major implications for the insurance and financial sectors, considering their investment yields and income are likely to fall with the falling gilt yields. AIG‘s (NYSE:AIG) stock has fallen over 7% following the Brexit vote on June 23 amid increased economic uncertainty and fears of falling investment income owing to subdued interest rates and falling yields.

Impact Of Lower Interest Rates

Relevant Articles
  1. Up 14% In The Last Twelve Months, What To Expect From American International Group Stock In Q4?
  2. Up 9% In The Last One Month, Where Is American International Group Stock Headed?
  3. American International Group Stock Is Undervalued
  4. American International Group’s Stock Is Trading Below Its Intrinsic Value
  5. American International Group Stock To Post Mixed Results In Q4
  6. Forecast Of The Day: AIG’s International Net Premiums Earned

AIG is expected to generate about 37% of its revenues from investments in the global markets in 2016, totaling over $21 billion. aig-28
The risk of persistent lower interest rates will definitely impact this metric, considering fixed maturity securities, mortgage loans, hedge funds and re-investments contributed almost 98% of AIG’s net investment income in the last three years. aig-27AIG has considerable exposure to fixed maturity securities in the U.S., U.K as well as the rest of Europe. Post-Brexit, the yield on the 10-year U.S. treasury note fell below 1.5% for the first time since 2012, yields on U.K. benchmark government bonds fell below 1% for the first time on record and 10-year government bond yields in Germany ended below 0%. Other developed economies such as France, Sweden, Switzerland and Japan (where AIG has considerable investments) all touched all-time lows.aig-26

The fall in investment yields is likely to have a considerable impact on AIG’s valuation, considering that investments contribute over 60% of the company’s valuation, per our estimates. We expect AIG’s Life and Retirement investment yield to rise to about 5.6% by the end of our forecast period. Owing to persistent low interest rates and falling government bond yields, there could be a downside of about 10% to the company’s valuation if its Life and Retirement investment yield rises to only 4.5%.

Interactive Institutional Research (Powered by Trefis):

Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap |More Trefis Research