Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Is AIG Making Money?

American International Group; or AIG, became infamous as the face of the great financial crisis of 2007-2008. The company survives but is AIG making money today?

Currently, AIG (NYSE: AIG) is making money from its insurance and finance business. For instance, AIG reported a gross profit of $5.792 billion, an operating income of $2.243 billion, and $1.109 billion in net income for the quarter ending 30 June 2019.

AIG generated that money from revenues of $12.591 billion. Moreover, Stockrow estimates those revenues grew at a rate of 7.92% during the last quarter. Notably, AIG’s revenues grew from $12.539 billion on 31 March 2019 to $12.591 billion three months later.

How Much Money does AIG Have?

Currently, AIG is making money but burning cash. To explain, AIG reported a negative free cash flow of -$296 million and an operating cash flow of -$296 million on 30 June 2019.

Tellingly, AIG had a financing cash flow of $5.218 billion on 30 June 2019. I think the financing cash flow indicates AIG could borrow money to finance its operations. That is reminiscent of 2007-2008 when AIG melted down because of investments in questionable mortgage bonds.

The negative cash flows could indicate AIG’s claim payments exceed its premium revenues. Ideally, insurance companies make money when premiums exceed claims paid.

How Climate Change could Threaten AIG

One reason, AIG’s claims could exceed premiums is Climate Change. Scientists think Climate Change disasters like Category Five Hurricanes and catastrophic wildfires are increasing.

 AIG has a heavy exposure to Climate Change because it was America’s 10th largest property and casualty insurer with $14.189 billion in premiums written in 2017, Reinsurance News estimates. For instance, AIG could hold fire insurance policies on houses and businesses wildfires threaten.

In addition, AIG has limited resources. Stockrow reports AIG had $3.167 billion in cash and equivalents on 30 June 2019. In addition, AIG had $13.81 billion in short-term investments on 31 March 2019.

Can AIG Survive Climate Change?

Interestingly, AIG had $522.269 billion in total assets on 30 June 2019. However, many of those assets are in the form of insurance policies exposed to Climate Change.

Currently, Climate Change is increasing the number of destructive extreme weather events like hurricanes, storms, floods, and drought; which can make wildfires more likely, the Environmental Defense Fund claims. Plus, climate change can make extreme weather worse by driving higher storm surges and more flooding.

Thus, another catastrophic effect of Climate Change could be financial crises. To elaborate, insurers could spend all their money paying claims and get desperate for quick cash. Consequently, insurers could make high-risk investments to get more cash to cover claims.

Will Climate Change Trigger Financial Crises?

Remember, it was risky investments in Collateralized Debt Obligations (CDOs) that caused AIG’s collapse in 2007 and 2008. AIG lost so much money on CDOs, the federal government had to bail it out.

Thus, Climate Change could threaten the taxpayer by necessitating more government bailouts of the financial industry. Moreover, Climate Change could threaten retirement investments because many retirement accounts invest in stocks and insurance products.

Therefore, Climate Change can threaten your money if you live far away from the seashore or the desert. In particular, Climate Change threatens the insurance industry and some popular investments.

For example, Berkshire Hathaway (NYSE: BRK.B) was America’s second largest property causality insurer with $46.007 billion in premiums in 2017. Specifically, Berkshire Hathaway (NYSE: BRK.A) owns one of America’s popular auto insurers; GEICO. Other big property casualty insurers Americans rely on include Allstate (NYSE: ALL), Progressive (NYSE: PGR), Liberty Mutual, and the Travelers.

Is Insurance Still a Value Investment?

Skeptics will wonder if insurance is still a value investment in an age of Climate Change. To clarify, losses from Climate Change catastrophes could make it impossible for property and casualty insurers to make money.

Conversely Mr. Market provides some evidence insurance is still a value investment. Specifically, AIG shares were trading at $55.76 on 12 September 2019, so they are cheap. Yet, AIG paid a 32₵ quarterly dividend on 13 June 2019. However, notes AIG has not recently reported any dividend growth.

AIG offered investors a dividend yield of 2.26%, an annualized payout of $1.28, and a payout ratio of 28.1% on 12 September 2019. However, I do not think the dividends make up for the potential risks facing AIG.

Investors Need to Pay Attention to Climate Change

Investors need to pay attention to Climate Change because it could dramatically disrupt the markets. In fact, I think Climate Change could threaten some formerly safe value investments like insurance companies.

Thus, I advise investors looking for stocks to short to look at the news and science about Climate Change. I think shrew investors could investors could make money from Climate Change. However, many investors will lose money from Climate Change.

Like everybody else, investors need to learn to fear Climate Change. Climate Change could disrupt everything including the markets. Consequently, investors need to be leery of insurance companies like AIG.