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AIG’s Hedge Funds Rebound After $2 Billion Losses

Date: Monday, August 10, 2009
Author: Andrew Frye, Bloomberg

American International Group Inc., the insurer bailed out by the U.S., benefited from hedge funds for the first time in a year as the company returned to profitability in the second quarter.

AIG earned $121 million from hedge funds in the period after the holdings cost the New York-based insurer $2 billion in the nine months ended March 31, the company said last week. Hedge fund at MetLife Inc., the biggest U.S. life insurer, also improved, beating the company’s forecast.

AIG and MetLife, which invest mostly in fixed income securities, are again benefiting from hedge funds after the assets weighed on results last year. In the second quarter, hedge funds posted an average gain of 9.1 percent, the best in more than nine years, according to a Chicago-based researcher.

“What was bad, is now good,” said Randy Binner, an analyst with FBR Capital Markets. Hedge funds and corporate debt are helping insurers, while “cash is a drag” he said.

Private-equity and hedge funds, which often use borrowed money to amplify returns, suffered in the frozen credit markets after Lehman Brothers Holdings Inc.’s bankruptcy in September. The slump hurt U.S. insurers, which nearly doubled holdings in the so-called alternative or “partnership” investments to about $50 billion in two years ended Dec. 31, 2007.

Private Equity

Investments in buyout funds remained unprofitable for AIG in the second quarter for the fifth straight period. The private equity holdings cost the insurer $348 million, compared with $900 million in the first quarter and $671 million in the last three months of 2008.

Former Chief Executive Officer Edward Liddy said in October that he may unwind private equity investments as he dismantles the company to lower risk and repay loans within the U.S. bailout. The government rescue later swelled to $182.5 billion.

AIG posted second-quarter net income of $1.82 billion on Aug. 7 on narrowing investment losses and a rebound in the value of some derivatives. It was the company’s first profit in seven quarters. AIG doubled last week on the New York Stock Exchange.

AIG had $6.7 billion of hedge fund assets and $13.8 billion in private equity as of March 31, compared with $11.5 billion and $17.9 billion a year earlier. The company posted a $3.7 billion gain on partnership assets in 2007 and a $2.4 billion deficit on the holdings last year when the company was rescued by the U.S. because of record losses tied to mortgages.

‘The Main Problem’

“Hedge fund performance has been positive in the second- quarter” for insurers, Paul Newsome, an analyst with Sandler O’Neill Partners LP, said in an interview. “The main problem wasn’t that they were in it; the main problem was that they were in it in a big way.”

CNA Financial Corp., the insurer controlled by Loews Corp., said partnerships posted a $165 million gain in the three months ended June 30 after losses in the three prior quarters.

Hedge funds, mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall, lost 18.3 percent in 2008 as they misjudged the severity of the biggest financial crisis since the Great Depression. The loss was the worst since Chicago-based Hedge Fund Research Inc. began tracking data in 1990.

Insurers had $44.7 billion in private equity and hedge funds holdings in 2008, down about 10 percent from $49.8 billion in 2007, according to the National Association of Insurance Commissioners, which collects data on firms’ U.S. holdings.

MetLife, Allstate

MetLife is among insurers reversing course and using cash accumulated in 2008 to reach for higher yields as stock and bond markets recover. The company more than doubled its cash position in the last six months of 2008 to $38.1 billion.

MetLife Chief Investment Officer Steven Kandarian brought that total down to $21.3 billion as of June 30 by buying U.S. securities, corporate debt and government-backed mortgages. The cash yield fell to 0.47 percent in the second quarter from 2.89 percent in the year-earlier period.

Kandarian said on July 31 that second-quarter hedge fund returns beat the New York-based insurer’s projections.

Allstate Corp., the largest publicly traded U.S. home and auto insurer, reported its first profit in a year in the second quarter as it put $5 billion of cash in higher-yielding securities. About 80 percent of that went into corporate debt, 15 percent into equities and a “small portion” into hedge funds, Chief Investment Officer Judy Greffin said last week.

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net.