In the wake of the Federal Reserve’s Operation Twist as well as current economic conditions we have revisited our forecasts for the insurance sector and have made changes to our estimates for Hartford Financial (NYSE:HIG) and AIG (NYSE:AIG). We have adjusted our price estimate for Hartford from $22 to $20, which is still about 20% ahead of the current market price while our $20 price estimate for AIG is about 10% below the current market price.
We highlight the changes to our forecasts below.
Fixed Maturity Yields Expected to Decline
Operation Twist, through which the Fed is moving from short-term into longer-term securities, will have a direct impact on insurance companies’ yields on fixed maturity investments. The $400 billion program has already caused the 10-year treasury yield to drop below 2%. Over the next two years, we believe that the Fed is unlikely to raise interest rates and insurance companies such as Hartford Financial and AIG will see a decline in their fixed maturity yields. Since Hartford Financial and AIG invest more than $75 billion and $200 billion in fixed maturity securities, respectively, the decline in yields will significantly impact the companies.
In addition to the yield on fixed maturity securities,we expect that the yield from equity securities as well as mortgage loans and other assets will decline in 2011 and remain low in 2012 due to weak macroeconomic conditions, but will gradually improve thereafter as the economy recovers.