AIG Says Risk Rose on Munis; Defaults May Limit Liquidity
AIG Says Risk Increased $46.6 Billion Muni-Bond Portfolio
JB Reed/Bloomberg
American International Group Inc., the bailed-out insurer, said it faces increased risk of losses on its $46.6 billion municipal bond portfolio and that defaults could pressure the company’s liquidity.
American International Group Inc., the bailed-out insurer, said it faces increased risk of losses on its $46.6 billion municipal bond portfolio and that defaults could pressure the company’s liquidity. Photographer: JB Reed/Bloomberg
American International Group Inc., the bailed-out insurer, said it faces increased risk of losses on its $46.6 billion municipal bond portfolio and that defaults could pressure the company’s liquidity. The insurer declined as much as 6.3 percent in New York trading.
“Because of the budget deficits that most states and many municipalities are continuing to incur in the current economic environment, the risks associated with this portfolio have increased,” New York-based AIG said yesterday in its annual report to the Securities and Exchange Commission.
AIG said that “several” issuers of bonds it holds have been downgraded, amid budget pressures. As of Dec. 31, the company had more than $700 million of state general-obligation bonds from California, which has the lowest Standard & Poor’s credit rating of any U.S. state. It also held more than $200 million in the bonds from Illinois.
“Defaults, or the prospect of imminent defaults, by the issuers of state and municipal bonds could cause our portfolio to decline in value and significantly reduce the portfolio’s liquidity” at insurance subsidiaries, including property- casualty insurer Chartis, the company said. Defaults “could also adversely affect AIG parent’s liquidity” if the company was required to bolster the units, the firm said.
Chartis’s portfolio has been reduced to about $36.3 billion, and 99 percent of the municipal holdings are rated A or better, AIG Chief Financial Officer David Herzog said in a conference call today with analysts.
‘Quality Objectives’
AIG’s U.S. property-casualty companies are adding taxable securities and reducing tax-exempt municipal bonds in their portfolios to meet “liquidity, duration and quality objectives,” according to the filing.
“The risk is real,” said Phillip Phan, professor at the Johns Hopkins Carey Business School in Baltimore, in an interview today. “They’re going to have to do a lot more homework before they can quantify how bad the situation is.”
The insurer had said in its third-quarter filing in November that it “does not expect any significant defaults in portfolio holdings of municipal issuers over the near term.”
AIG dropped $1.89, or 4.7 percent, to $38.54 at 4:02 p.m. in New York Stock Exchange composite trading. The insurer has declined about 20 percent this year, compared with a 4.9 percent gain in the Standard & Poor’s 500 Index.
Fund Withdrawals
Investors pulled about $610 million from U.S. municipal- bond mutual funds this week, the 15th-straight period of outflows, according to Lipper U.S. Fund Flows. Withdrawals have totaled $26.4 billion since mid-November, as states and local governments grappled with budget deficits and rising pension costs. Lipper is a Denver-based research company.
Justin Hoogendoorn, a bond strategist with BMO Capital Markets in Chicago, said he was surprised by AIG’s statement. “What are they seeing that we’re not seeing?” he said.
From Jan. 18 through yesterday, tax-exempt investments have returned 3.03 percent, according to the Bank of America Merrill Lynch Municipal Master index, which accounts for price changes and interest income.
“Since about mid-January, you’ve got a nice rebound in the market,” Hoogendoorn said.
Travelers
AIG’s gross unrealized gains on the municipal bond portfolio narrowed to $1.73 billion on Dec. 31 from $3.32 billion at the end of the third quarter, according to the filing. Rival insurer Travelers Cos., which holds a $39.5 billion municipal portfolio, said last month that gross unrealized gains on the securities narrowed to $1.6 billion from $2.8 billion during the period.
The figures, reflecting market fluctuations that aren’t counted toward earnings, are monitored by investors and rating firms as a gauge of financial strength.
Property-casualty insurers buy municipal bonds with policyholder premiums and hold the securities to pay future claims. Travelers, the only insurer in the Dow Jones Industrial Average, said this month its portfolio may face a higher risk of defaults, which could result in investment losses and reduced income.
“There are a number of things that you can be concerned about at AIG, and this is one of them,” said Cliff Gallant, an analyst at KBW Inc., who has an “underperform” rating on the stock.
AIG was rescued in 2008 after losses on securities tied to home loans. Robert Lewis, who stepped down as the company’s chief risk officer last year, said the insurer had underestimated the risk of subprime mortgages.
The insurer, which has repaid the Federal Reserve, is majority owned by the U.S. Treasury Department, which plans to divest its shares. AIG said yesterday that fourth-quarter net income was $11.2 billion as the company booked gains selling businesses to help repay its rescue.
To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net; Andrew Frye in New York at afrye@bloomberg.net
To contact the editor responsible for this story: Dan Kraut in New York at dkraut2@bloomberg.net
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