American International Group Inc. (AIG:US), the bailed-out insurer, is comfortable taking “liquidity risk (AIG:US)” in its investment portfolio as it seeks to improve returns amid low interest rates, the head of its largest unit said.
“We’re willing to take more liquidity risk, but less market risk,” Peter Hancock, the head of AIG’s property- casualty unit Chartis, said today at an investor conference in New York hosted by Deutsche Bank AG. “So I don’t particularly like equities, but I do quite like some of the illiquid, distressed mortgage assets that are available.”
Chief Executive Officer Robert Benmosche, 67, has added to AIG’s holdings of mortgage investments as the U.S. Treasury Department winds down its stake (AIG:US) in the insurer, which was rescued in 2008 after bets on the housing market soured amid a deepening credit crisis. The New York-based company’s holdings of non-government-guaranteed residential and commercial-mortgage backed securities climbed by $11.1 billion since 2010 to $28.4 billion at the end of March, according to regulatory filings.
AIG can hold investments to maturity, which limits its risk in investing in assets that are less liquid, Hancock said. The insurer is also carrying forward losses from prior years that will reduce its tax bills, making municipal bonds less attractive. AIG’s muni holdings declined to $37.7 billion as of March 31 from $46.6 billion at the end of 2010.
Near record low interest rates have pressured returns at insurers that rely on investment income from fixed-income securities for profit. The yield on 10-year Treasuries was 1.73 percent at 12:33 p.m. in New York, near the record intra-day low of 1.67 percent in September.
Maiden Lane III
AIG purchased $600 million in CMBS that had been held by a Federal Reserve Bank of New York-controlled fund called Maiden Lane III, Benmosche said May 4. Maiden Lane III was created as part of the company’s bailout to hold assets backed by AIG.
The insurer has an equity stake in the portfolio and shares in the gains if the assets are sold at a profit. The New York Fed resumed a sale today of $1.7 billion in Maiden Lane III holdings after announcing a delay May 17 because information on some of the debt hadn’t been made available to bidders.
“It was a technicality that put the thing on a one-week hold,” said Hancock. “We’re now completely back on track for Maiden Lane III monetization.”
The portfolio is one of the sources of funds AIG may use for capital management, Hancock said. The insurer is also seeking to divest its plane-leasing unit and sell its remaining stake in Hong Kong-based insurer AIA Group Ltd.
AIG has sold non-U.S. life insurers, a consumer lender and other businesses to pay back its rescue, which swelled to $182.3 billion as the U.S. extended more credit and lowered the interest charged. The Treasury has cut its stake (AIG:US) by a third to 61 percent through three share sales. In the most recent two, AIG bought back a combined total of about $5 billion in stock.
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