LBO, Hedge Fund ‘Anchor’ Weighs Down AIG, Hartford (Update1) 

By Hugh Son

April 27 (Bloomberg) — Insurers’ holdings in private equity and hedge funds shrank 10 percent last year as companies pared riskier investments amid a global decline in stocks and slowdown in leveraged buyouts.

The companies had $44.7 billion in the so-called alternative assets in 2008, down from $49.8 billion in 2007, according to the National Association of Insurance Commissioners, which collects data on firms’ U.S. holdings.

The decline is a reversal after the holdings almost doubled in the two years ended Dec. 31, 2007, as insurers reached for higher yields than possible on most bonds. The slide increased pressure on insurers including American International Group Inc. at the same time the industry posted record writedowns tied to housing. AIG lost $2.38 billion on alternatives in 2008, compared with a $3.72 billion gain in 2007.

“In the good years, it’s an amplifier of returns, it will help you exceed earning expectations,” said Josh Goldfarb, a financial advisory director specializing in insurers at PricewaterhouseCoopers LLP. “In the bad years, it’s an anchor around your legs, it can really drag a company down from a returns standpoint.”

Hedge funds, mostly private pools of capital whose mangers 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.

‘Harshest’ Losses

Investors in private-equity funds face writedowns of 10 percent to 20 percent, with the “harshest” losses coming from the biggest buyout firms, said Steve Kandarian, chief investment officer of MetLife Inc., the biggest U.S. life insurer, in a conference call in February.

Buyout funds that purchased businesses with the intention of reselling them or holding public offerings face a “lack of exit opportunities,” as the recession limits potential investors’ access to credit, Kandarian said. The combined value of mergers and acquisitions worldwide plunged 39 percent in 2008 from a year earlier.

Life insurers, which held $33.1 billion of the alternatives, three times more than property-casualty companies, accounted for most of the decline, according to NAIC data. AIG, based in New York, said its holdings shrank by 16 percent to $24.4 billion last year. That accounts for about 3.8 percent of the company’s total investments. The insurer was rescued by the U.S. last year after losses tied to subprime loans.

AIG, MetLife

AIG Chief Executive Officer Edward Liddy, appointed by the government last year, named a new investment head in January, and announced plans in October to sell AIG’s remaining stake in Blackstone Group LP, the world’s largest private-equity firm. AIG spent $150 million in 1998 for a 7 percent stake in Blackstone, which went public in 2007.

MetLife reported worsening results from the assets every quarter in 2008, culminating in a $540 million fourth-quarter miss of its expectations. In 2007, MetLife beat its target for alternative income every quarter, peaking in the final three months of the year with $270 million more than planned. The New York-based insurer had $6.04 billion of limited partnership interests as of Dec. 31, or about 2 percent of total investments.

The insurer’s stock is down about 16 percent this year through April 24 and plunged 43 percent in 2008 after gaining the prior five years.

‘Caught by Surprise’

Hartford Financial Services Group Inc. said that its holdings lost $445 million in 2008, compared with a $255 million gain the year earlier, as the size of the assets declined 11 percent to $2.3 billion. Hartford stock dropped 42 percent this year after plunging 81 percent in 2008. Hartford replaced its chief investment officer last year.

“Some insurers were caught by surprise as to how volatile” alternative investments where, said Paul Newsome, an analyst at Sandler O’Neill & Partners. “Now, they want to be as conservative as they possibly can.”

Mark Herr, an AIG spokesman, Shannon Lapierre of Hartford and Christopher Breslin of MetLife declined to comment.

Allstate Corp., the largest publicly traded U.S. home and auto insurer, saidthat its alternatives lost $36 million last year, compared with a $293 million gain the year earlier. The company had $2.79 billion in the assets as of Dec. 31.

Travelers, Chubb

Travelers Cos., the second-largest U.S. commercial insurer, will invest largely in bonds rather than spend like a “sailor on leave” to seek higher gains from private equity and hedge funds, Chief Executive Officer Jay Fishman said in September.

Travelers lost $137 million last year on a portfolio including private equity, hedge funds and real estate partnerships, compared with a $431 million gain in 2007.

“Our investment operations are in place to support our insurance operation, not the other way around,” Fishman said.

Chubb Corp., the insurer of corporate boards and high-end homes, said first-quarter results included a $248 million loss on alternative investments. The Warren, New Jersey-based company said last week that the second-quarter net realized loss from the holdings would probably be $50 million or less.

Hartford, MetLife, AIG, Travelers and Allstate are expected to announce first-quarter results this month or in May.

To contact the reporter on this story: Hugh Son in New York

Last Updated: April 27, 2009 08:15 EDT