AIG Impairments Top $600 Million as Elderly Outlast Lifespan Bet

American International Group Inc. had more than $600 million in impairments since the end of 2010 on death-benefits bets as the company was stuck paying insurance premiums for people who lived longer than the firm expected.

The insurer recorded $309 million of impairments in 2012 and $312 million in 2011, AIG said in its annual report last month. So-called life-settlement contracts let investors buy insurance policies from individuals and pay the premiums until those people die. The arrangement is less profitable for AIG the longer a person survives, the opposite of traditional life coverage sold by the firm, in which early deaths hurt results.

Chief Executive Officer Robert Benmosche has more recently added bets on home loans as he refocuses the investment portfolio. He said in 2011 that New York-based AIG reviewed the life contracts and that “this is not an area we’re going to be emphasizing.” It can be difficult to sell the holdings, said Gary Brown, CEO of CMG Life Services Inc.

“It’s truly almost always a buyer’s market,” Brown, whose firm oversees contracts with a face value of more than $5 billion for institutional clients, said yesterday at an industry conference in New York. “You’ve got to hold to maturity. You can’t plan on this being freely tradable.”

AIG had 5,673 policies with a carrying value of about $4.2 billion at the end of 2012, compared with 5,901 policies carried at $4 billion a year earlier, and 2,632 policies worth about $1.6 billion at the end of 2007

Investors like AIG gain if the death benefit exceeds the purchase price and cost of maintaining a policy. The value of the contracts is reduced when AIG determines that a person will live longer than expected. The insurer doesn’t restate the value higher if it expects the contract to be more profitable, Peter Hancock, head of AIG’s property-casualty business, said on a 2011 conference call.

Management’s Intent

Some of the impairments stem from AIG’s increased use of medical information starting in 2011 to determine the contracts’ value, according to the filing. The insurer also recorded impairments because of a “change in management’s intent about continuing to hold certain life-settlement contracts,” the document shows. Jon Diat, an AIG spokesman, declined to comment.

“In some cases, this updated information indicates that an individual’s health has improved, resulting in an impairment loss due to revised estimates of net cash flows from the related contract,” according to the Feb. 21 filing.

“You’re betting against mortality improvements, typically, and that’s not been a good bet,” said Paul Newsome, an analyst at Sandler O’Neill & Partners LP. “It’s a tough business for everybody.”

Strategic Review

Impairments of $309 million on the death-benefit bets last year were about 7.4 percent of the assets at the end of 2012. That compares with impairments on bonds available for sale of $723 million, or about 0.3 percent of the $270 billion portfolio.

The insurer’s life-settlement impairments climbed from $74 million in 2010. Income on the life-settlement contracts was $253 million in 2012 and $320 million a year earlier.

AIG “completed a very deep strategic review of what we’re doing here,” Benmosche said on an Aug. 5, 2011, conference call with analysts. “We’re studying this as an asset class, and we don’t think it’s something we’re going to be growing.” Benmosche became the insurer’s CEO in August 2009.

The secondary market for U.S. life policies emerged in the 1980s when the AIDS epidemic led some patients to sell their insurance policies to pay for treatment.

The assets appeal to investors because returns aren’t tied to fluctuations in stocks or bonds, said Bill Taylor, who oversaw life-settlement bets at AIG until last year, when he left to lead Miravast LLC, which is raising capital to invest in the contracts. Taylor, who spoke by phone, declined to discuss AIG’s portfolio.

Institutional Capital

The market for the contracts may expand as people sell their policies to raise money for health care as they grow older, Alan Buerger, CEO of Coventry, said yesterday at the conference.

“There’s more institutional capital interested in investing in this asset, this non-correlated asset, than ever before,” said Buerger, whose company helped create the secondary market for life insurance.

The face value of life-settlement policies industrywide climbed to $35 billion at the end of 2011 from $4.2 billion in 2003, according to Conning & Co., a Hartford, Connecticut-based research firm. AIG’s policies had a face value of $17.7 billion at the end of 2012, compared with $18.1 billion a year earlier.

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