AIG wagers on subprime betting second time different

May 16 (Bloomberg) -- American International Group Inc., the insurer that needed a $182.3 billion bailout from the U.S. government in 2008 after failed mortgage investments, is betting this time it’s different.

Chief Executive Officer Robert Benmosche has increased non- government-guaranteed residential and commercial-mortgage backed securities holdings by $11.1 billion since 2010 to $28.4 billion at the end of March, according to regulatory filings. The New York-based insurer has acquired debt sold by the Federal Reserve that the central bank acquired from AIG when the company was rescued, including $600 million of CMBS last month.

AIG, which is also bolstering its unit that insures home loans with low down payments, is wagering that a more than 35 percent plunge in property values, cheaper prices for the securities and fewer competitors justify returning to investments that four years ago required the government to step in when it was unable to meet margin calls to banks.

“This is massively illiquid, under-loved asset risk that’s actually really attractive,” Josh Stirling, an analyst with Sanford C. Bernstein & Co. said. “The one thing this doesn’t do for AIG is help simplify the story.”

Jim Ankner, an AIG spokesman, declined to comment.

Benmosche is targeting debt that may yield in excess of 10 percent as the Fed pledges to hold interest rates near zero through the end of 2014 to bolster the economy and help lower the 8.1 percent jobless rate.

Investment Income

Fed policy makers and Europe’s debt crisis have pushed down benchmark bond yields to below 1 percent, weighing on returns at insurers and forcing them to buy lower-rated or longer-duration securities to maintain profits. AIG has put more cash to work after repaying most of its bailout funds, regaining access to capital markets through debt and equity sales and having its outlook lifted by ratings company A.M. Best.

It reported pretax investment income of $7.1 billion in the quarter ended March 31, a 28 percent increase from a year earlier. That was the most AIG earned from its holdings since 2007 before the financial crisis.

Pressure to generate profit from bonds held to back claims has increased as the company’s property-casualty insurer Chartis posted underwriting losses in 2010, 2011 and for the first quarter of this year, meaning the business spent more on claims and expenses than it earned in premiums.

Chartis, which sells coverage in the U.S., Europe and Asia, is AIG’s largest unit, followed by the SunAmerica life insurer.

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