Hedge-Fund Losses Drive AIG to Commercial Mortgages, Bonds

  • AIG is among U.S. insurers boosting property lending
  • $11 billion hedge fund portfolio to be reallocated after slump

American International Group Inc. is expanding bets on property lending and safe fixed-income securities after hedge-fund investments soured.

“We are reallocating roughly 50 percent of our hedge-fund portfolios,” Sid Sankaran, who is taking over as the insurer’s next chief financial officer, said in a conference call Friday. The shift will be “primarily into investment-grade bonds and commercial-mortgage loans, which we believe will free up about $2 billion in additional capital” because of how the assets are treated by regulators, he said.

Chief Executive Officer Peter Hancock is under pressure to limit risk and return capital to shareholders after two straight unprofitable quarters, driven by both poor insurance underwriting and faltering investments. The New York-based company said late Thursday when it reported annual results that it is nominating hedge fund manager John Paulson and a representative of activist investor Carl Icahn’s firm to the board of directors.

AIG’s hedge fund holdings generated losses of $220 million in the fourth quarter and $324 million in the third. The insurer had about $11 billion in more than 100 hedge funds through last year, and plans to reduce the allocation by about half, Sankaran said.

Returning Capital

Investors should expect annual net investment income to decline by $200 million to $250 million on the shift, if they were assuming a 9 percent normalized return on hedge funds, Sankaran said. The reallocation will take several quarters, he said.

Hancock announced a plan on Jan. 26 to return $25 billion to shareholders over two years, with much of the funds coming from assets sales and reinsurance deals, both of which will also reduce investment income in future periods. He said at the time that he planned to scale back hedge fund holdings, and Sankaran provided more detail Friday on the scope of the retreat and plans for new investments.

The insurer already has been boosting bets on commercial mortgages. The portfolio stood at $20.8 billion as of Sept. 30, with the highest allocations to office and retail properties, and the greatest concentration in New York and California. That compares with $18.9 billion at the end of 2014 and $16.2 billion a year earlier. AIG has more than $330 billion of invested assets, mostly in bonds.

Commercial Mortages

Investors are increasingly turning to more illiquid holdings including real estate to combat market volatility, according to a survey from BlackRock Inc., the world’s largest asset manager. MetLife Inc., the biggest U.S. life insurer, has also been increasing property wagers, loaning about $14.3 billion for commercial real estate globally last year, the most in the company’s history of more than 140 years.

The 12-month return on commercial mortgages held by life insurers rose to 4.23 percent as of Sept. 30 from 3.28 percent through June 30, according to the LifeComps Commercial Mortgage Loan Index. Office and apartment loans were top performers, according to Northwestern Mutual Life Insurance Co., one of the companies whose investments are tracked by the index.

AIG shares climbed 4.9 percent to $53 at 4:15 p.m. in New York, paring its loss for the year to about 14 percent. Hancock announced a $5 billion share buyback program on Thursday and a 14 percent dividend increase as part of his capital-return plan.

Before it's here, it's on the Bloomberg Terminal.