Underperforming Alternative Investments Weighed Heavily On AIG In 2018

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AIG (NYSE: AIG) released its fourth quarter and full year results on February 13. Revenues declined by 4% to $47.3 billion in 2018, compared to $49.5 billion in 2017. Insurance premiums and investment income are the drivers of AIG’s top line, with a contribution of 71% and 29% to total revenues, respectively. Investment income tanked by 12% in 2018, a $1.7 billion drop compared to last year. There was a moderate 2% decline in total premiums, driven by a 36% decrease in Life & Retirement premiums.

We currently have a price estimate of $53 for AIG, which is 20% above the current market price. You can view our interactive dashboard What Are AIG’s Key Sources of Revenue? to modify the company’s key drivers and observe their impact on share price, and see all of our Financial Services company data here.

Investment Portfolio Performance

AIG’s investment portfolio is comprised of fixed maturity securities, equity securities, mortgages, alternative investments, and real estate investments. In 2018, the investment yield for other fixed maturity securities and alternative investments dropped from 11.79% to 5.35% and from 11.77% to 5.01%, respectively. Though the share of these securities is only 5% of the overall portfolio, it is still a noteworthy decline, especially if it recurs.

Catastrophe Losses, Declining Premiums

Net catastrophe losses totaled to $2.9 billion (pre-tax) in 2018, compared to $4.2 billion in the prior year. The Papua New Guinea earthquake, Hurricane Florence, Typhoon Jebi, and Hurricane Michael were significant catastrophe events for AIG this year. Despite a lower contribution of catastrophes in 2018, the combined ratio of the General Insurance segment remained elevated at 111.4% and the adjusted combined ratio increased by 2%, driven by the underperforming North America sub-division.

Life & Retirement premiums declined by 36%, driven by a sharp drop in Institutional Markets revenues. In the prior year, the Life & Retirement segment reported impressive growth from its pension risk transfer (PRT) business and sales from Laya Healthcare.

 

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