AIG reports huge drops in profits and income
For the first quarter, American International Group, Inc. (NYSE: AIG) reported that its operating profits fell to $773 million, a decline of 54 percent. The company attributed its weak numbers largely to its investments in hedge funds, which have been highly volatile this year. The company’s reported earnings per share for the quarter was far lower than the estimates made by analysts of $1.00. Instead, the company reported earnings of just .65 cents per share. Its net investment income also fell almost 44 percent to $577 million.
AIG has dealt with low rates for years. In order to increase its return on investments, it has allocated an increasing amount to higher risk alternative investments, including hedge funds. This has led to losses for the past nine months. AIG has been working to reduce its hedge fund exposure to $5.5 billion by 2017. It was at $11 billion as of the end of 2015. AIG has reacted by cutting its costs as it doesn’t seem to be able to get higher returns through its risky investments. The company did report its operating costs had fallen from the same period last year by 5 percent. This decline does not seem to be enough to stave off the company’s investment and profit declines, however, meaning it will likely need to cut costs even more.
Pressure from regulators
At the same time as AIG has been dealing with its exposure to hedge funds, it has also been dealing with pressure from regulators. It may have to set aside additional capital if it retains its designation as a SIFI. MetLife’s win in federal court in March 2016, in which a federal judge struck down that company’s SIFI designation, might lead AIG’s investors to renew their push for AIG to likewise fight it.
Conclusion: Avoid AIG
The long term picture for AIG is likely to get worse before the company sees any improvement. It is likely that the current exposure to hedge funds will continue to place downward pressure on the company’s profits and net investment income. With rates continuing to be low and the company possibly needing to set aside additional capital, we continue to recommend that investors avoid AIG.
