American International Group Inc., the insurer that repaid a U.S. bailout last year, said a surge in interest rates in the second quarter fueled a $9 billion reduction in its bond portfolio as corporate debt slumped.
The available-for-sale bond holdings stood at about $261 billion as of June 30, down from $270 billion three months earlier, as net unrealized gains fell, New York-based AIG said yesterday in a filing. That contributed to a 2.1 percent decline in book value to $66.02 per share as of June 30 from three months earlier.
The bond decline was caused by rising interest rates, as investors weighed signs that the Federal Reserve, led by Chairman Ben S. Bernanke, might scale back its stimulus efforts. The Bank of America Merrill Lynch U.S. Corporate & High Yield Index lost 4.61 percent in May and June.
“With the recent rise in interest rates, we saw the unrealized gain position in our general account partially erode,” Jay Wintrob, chief executive officer of AIG’s life- insurance unit, said on an Aug. 2 conference call with analysts.
Net unrealized gains on AIG’s available for sale bonds fell to $12.5 billion on June 30 from $22.7 billion three months earlier. On AIG’s corporate bond holdings, the measure dropped to $6.8 billion as of June 30, from $14 billion at the end of March. The insurer held about $144 billion of company debt as of June 30 in its main portfolio.
The decline in per-share book value was 7.3 percent in the second quarter at MetLife Inc., the largest U.S. life insurer. At Allstate Corp., the largest publicly traded seller of property-casualty coverage, the measure of assets minus liabilities dropped by 4.2 percent a share.
Buffett’s Maneuver
Warren Buffett built shareholder equity at his Berkshire Hathaway Inc. in the second quarter by sidestepping the bond slump. Buffett typically invests in stocks and buys companies, while holding a large cash stockpile.
AIG’s investments, which also include Treasuries, structured securities and equities, stood at $358.2 billion on June 30. Jon Diat, an AIG spokesman, declined to comment on the insurer’s portfolio. U.S. corporate debt recovered 0.9 percent since the end of June through Aug. 2, according to index data from Bank of America Merrill Lynch.
The unrealized gains don’t count toward earnings. Insurers often hold bonds to maturity, meaning they may not realize gains or losses tied to interest-rate fluctuations. That contrasts with the treatment of bonds that are written down when a borrower’s creditworthiness deteriorates.
AIG’s largest corporate debt holding in its main portfolio was in utilities. Measured at fair value, those holdings declined to $23.7 billion on June 30 from $24.7 billion at the end of March. Investments in bonds of communications companies fell to $11.2 billion from $11.7 billion.
Life Insurance
Higher yields may increase AIG’s profits on some products that are sensitive to interest rates, particularly in life insurance, CEO Robert Benmosche said on the call.
“We see rising interest rates, at least for the first couple hundred basis points, as a big positive,” said Benmosche, 69. “That will be very helpful for AIG.”
AIG said it recorded gross realized gains of $1.33 billion from selling available-for-sale fixed-maturity securities, and gross losses of $56 million. The company said it sold $12.2 billion of bonds and equities from that portfolio. AIG has been selling some assets to realize gains, so that it can use tax benefits tied to financial-crisis losses.
“We will not be paying any U.S. income taxes for some time,” Chief Financial Officer David Herzog said on the call.
Rising interest rates may threaten AIG’s ability to realize investment gains and make use of its past losses to offset taxes, the company said in yesterday’s regulatory filing.
With assistance from Charles Mead and Megan Hickey in New York. Editors: Dan Reichl, Peter Eichenbaum