AIG 2016 Review: Earnings & Investment Income In Focus

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AIG: American International Group logo
AIG
American International Group

AIG‘s (NYSE:AIG) stock is up over 5% in the last year following mixed financial results in the first three quarters last year. In the first nine months of 2016, the company’s top line declined by over 8% year-over-year (y-o-y) owing to a 9% decline in P&C revenue and 26% decline in corporate income. Total realized investment gains, reported as an adjustment figure in the financial results, declined by 174% y-o-y to a loss of $829 million in the first nine months of the year.

The stock is up over 10% in the last three months on AIG’s top line beating market expectations in the third quarter. In Q3 2016, the company’s revenues grew over 3% to $13.6 billion against consensus estimates of $12.9 billion on strong growth in Corporate and Other run-off insurance lines.
aig-18 aig-19 The insurer posted net income of $2.2 billion in the first three quarters of 2016 compared to over $4 billion in the same period last year. The company’s bottom line was influenced by declines in earnings from market-sensitive assets, a $455 million after-tax net loss of reserve discount on workers’ compensation reserves in the second quarter, and a $622 million structured settlement charge in Q3 2016 which had to be paid out to disabled recipients who had lived longer than the company had anticipated in 2010.

AIG has exited from or wound down most of its troublesome “legacy” products but this settlement charge is emblematic of how legacy policies can still hurt the insurer.

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Net Realized Capital Gains

AIG’s net realized capital gains declined from $1.13 billion in the first nine months of 2015 to a loss of $829 million in the same period last year on account of a 169% decline in sales of fixed maturity securities (on account of falling bond yields) and a 494% decline in foreign exchange transactions. This is a point of concern because AIG is expected to generate about 37% of its revenues from investments in the global markets in 2016, totaling over $21 billion. aig-21Post-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 all touched all-time lows. The risk of persistent lower interest rates will definitely impact AIG’s investment income, 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-20The 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 4.7% 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 6% to the company’s valuation if its Life and Retirement investment yield remains stable at around 4.0%.

Please refer to our complete analysis for AIG here.

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