American International Group Inc. (AIG:US), the insurer bailed out by the U.S. Treasury Department, more than doubled its risk related to the U.K. government while scaling back in Germany and France.
AIG’s aggregate credit risk tied to the U.K. surged to $3.42 billion as of June 30 from $1.39 billion three months earlier, the insurer said in a quarterly filing. The figure for Germany fell 16 percent to $1.38 billion, and French risk dropped 11 percent to $1.01 billion.
The insurer is reshuffling its portfolio (AIG:US) as it seeks to boost returns with yields near a record low. AIG has retreated from risk in nations that share the euro as a debt crisis in Greece and rising borrowing costs from Spain to Italy threaten the common currency. The U.K. is the largest European economy with its own currency.
“They’re trying to reduce some of their euro exposure,” said Paul Newsome an analyst at Sandler O’Neill & Partners LP. “They probably think that it’s a relative safe haven within the greater European environment.”
Credit risk can involve fixed-maturity securities, derivatives, equities, leases and other agreements, AIG said in the Aug. 2 filing, which also lists ties to companies such as banks. The U.S. government was AIG’s single largest credit exposure, at 23 percent of total equity, and exposure to the financial sector was $95.3 billion, or 90 percent of total equity. Jim Ankner, a spokesman for AIG, declined to comment.
AIG’s largest sovereign risk after the U.S. was Japan, at $8.87 billion, mostly related to holdings of insurance operations in the country, according to the filing. The firm said it had no direct or guaranteed credit exposure to Greek or Irish governments. Total euro zone exposure was $3.72 billion, down from $4.12 billion at the end of the first quarter.
AIG has assigned staff from Argentina to advise their counterparts in Athens as the insurer prepares for a possible Greece exit from the euro, Peter Hancock, who heads the property-casualty unit, said in May.
MetLife Inc. Chief Executive Officer Steven Kandarian has said that AIG disregarded his hints to sell European debt from peripheral countries before MetLife bought an AIG unit.
“I was sending smoke signals to my friends at AIG, ‘Please sell the peripheral debt,’” Kandarian said in February. “I couldn’t do much more than send smoke signals, and they chose not to sell.”
U.K. gilts had returned 3.4 percent this year as of Aug. 3, according to Bank of America Merrill Lynch index data. That compares with a gain of 2.3 percent for Treasuries, 3.3 percent for German bunds and 3.4 percent for sovereign debt globally. The pound has advanced about 5 percent against the euro this year and less than 1 percent versus the dollar.
Standard & Poor’s affirmed in July its AAA rating on the U.K., saying that the government “remains committed to implementing its fiscal program.” The ratings company downgraded the U.S. by one level a year ago.
Chancellor of the Exchequer George Osborne has pressed on with his planned fiscal squeeze to help protect Britain’s credit rating even after the economy slipped into a double-dip recession. Gross domestic product fell 0.7 percent in the second quarter, the biggest decline in more than three years.
Bond investors “have a declining number of options,” Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees $80 billion, said Aug. 3 in a telephone interview. “The U.K. is doing the right things. They are doing what people would like and they have crappy growth as a result, but they have one of the more solid balance sheets out there.”
Moody’s Investors Service has cut its growth forecasts for the U.K. and said the government will face increased difficulties in meeting its debt-reduction timetable. Moody’s sees the U.K. economy growing 0.4 percent this year and 1.8 percent in 2013. The economy will return to trend growth of 2.5 percent, though this will take longer than previously expected, Moody’s said.
The cost to protect against a default by the U.K. has fallen this year. Credit-default swaps on the nation declined to 55.3 basis points as of Aug. 3, compared with 97.5 basis points at the end of last year, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.
Swaps tied to Germany are quoted at about 68 basis points. Contracts linked to the U.S. are quoted at 46 basis points and France’s at 152 basis points, CMA prices show.
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
To contact the reporters on this story: Zachary Tracer in New York at firstname.lastname@example.org; John Detrixhe in New York at email@example.com.
To contact the editors responsible for this story: Dan Kraut at firstname.lastname@example.org; Dave Liedtka at email@example.com