How Has AIG’s Investment Portfolio Been Performing?

-0.48%
Downside
78.36
Market
77.98
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AIG: American International Group logo
AIG
American International Group

Much like other major life insurance companies, AIG (NYSE: AIG) derives a majority of its value (approx. 60%) from its investment portfolio. The life/retirement insurance business on its own is an extremely low-margin business, but that is offset by lucrative investments, on which insurers rely. AIG’s investment division invests the income from its premiums and deposits to generate investment income to cover future claims and benefits. The U.S. election and Brexit vote created increased volatility in credit markets and exchange rates as well as the equity markets, which may continue for some time. Additionally, the Fed kept interest rates relatively constant in 2015-2016, which resulted in declining yields for AIG’s investment division. However, we expect the yield to grow moderately going forward as the Fed has been increasing interest rates. Additionally, AIG is reducing the risks associated with the investment division by redesigning its portfolios.

Why AIG’s Investment Yields Declined

Most of AIG’s assets are invested in fixed maturity securities whose yields are closely tied to the interest rate environment. The investments mostly consist of corporate and municipal bonds, government issuances, common stock, real estate and hedge funds. AIG’s investment yield has been declining steadily over the past few years, from 6% in 2013 to below 4% in 2016. This represents the yield that AIG’s life and retirement division is able to earn on its invested assets. After the financial crisis in 2008, investment yields steadily improved from 3.7% in 2009 to around 6% in 2013. However, after 2013, the U.S. 10 year treasury bond yield declined due to the low-interest rate environment in the U.S. However, this is expected to change starting this year as the Fed has been increasing rates.

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We Expect Moderate Growth In Investment Yield

Going forward, we expect modest improvement in AIG’s investment yield. Here are the key rationales behind our forecast:

  1. The Fed increased interest rates twice in the first quarter of 2017 and is expected to increase rates further. This should boost Treasury yields, which should provide a boost to AIG.
  2. Over the past year, AIG has been narrowing its credit spreads, which has resulted in net unrealized gains in the last few quarters. AIG’s net unrealized gains in its available for sale portfolio increased by nearly $1 billion. We believe that the narrowed credit spread will reduce losses and continue to result in improved yields for AIG.
  3. AIG has also reduced its hedge fund portfolio to better manage risk, but has been increasing its alternative portfolios such as structured securities. This could reduce volatility, and allow yields to increase in a rising rate environment.

Please refer to our complete analysis for AIG

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