AIG Death-Bet Impairments Climb; Energy Bond Portfolio Shrinks

  • AIG took life settlement impairment of $540 million last year
  • Energy bets declined, while AIG scaled back on private equity

American International Group Inc. suffered losses last year in investment portfolios tied to death-benefits bets and energy bonds.

Impairments on so-called life settlements surged to $540 million in 2015 from $201 million a year earlier, according to a regulatory filing Friday. The contracts involve insurance policies that are purchased on the secondary market; AIG pays premiums until the covered person dies, then collects the death benefit. The company was previously hurt on the contracts when people lived longer than expected, and the latest setback was an increase in costs.

“In late 2015, several insurance providers gave notice of increases in policy premiums related to our investments in life settlements,” AIG said in the filing. That resulted in “lower future expected net cash flows, which are insufficient to recover our net investment on certain policies.”

Life settlements are among the holdings that Chief Executive Officer Peter Hancock is seeking to shrink as he focuses on buying investment-grade bonds and issuing commercial mortgages. The contracts were designated to a legacy portfolio that will be wound down through methods including sales, reinsurance and securitization, according to a company presentation last month.

Energy, Private Equity

The insurer had 4,554 life-settlement contracts with a face value of about $14.9 billion as of Dec. 31, according to the filing. Hancock has also said he will limit hedge fund bets after losses in recent quarters, and the company said in Friday’s filing that it will “continue reducing the size of the private equity portfolio.”

Plunging fuel prices also hurt AIG’s investments. The company had $13.9 billion worth of corporate debt in the energy sector as of Dec. 31, compared with $15.2 billion three months earlier and $16.5 billion at the end of 2014. The decline in energy exposure resulted from both the sale of securities and impairments, AIG said in the filing.

“While the energy investments are primarily investment grade and are actively managed, the category continues to experience volatility that could adversely affect credit quality and fair value,” the insurer said.

Losses on energy-related corporate bonds are expected to continue through 2016 for U.S. life insurers, according to an estimate by Fitch Ratings. The industry will suffer $3 billion to $4 billion in losses this year tied to those holdings, Fitch said this month. Rival MetLife Inc. has been reducing its energy wagers over the past year.

Office Reductions

AIG has also been reducing operating costs. The company had 350 offices in the U.S. at the end of December, compared with 400 the year earlier, according to regulatory filings. The number of offices in foreign countries was little changed at 500.

“We will continue to leverage our various off-shore centers, taking advantage of opportunities to centralize and standardize processes and platforms,” AIG said. “We believe there is great opportunity to further streamline our operating model.”

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