The insurer AIG is to make a push into residential property loans with plans to make “direct investments” in mortgages.
Doug Dachille, chief investment officer of the largest US insurer by market capitalisation, told investors that increasing AIG’s allocation to residential mortgages was one of his “key initiatives”.
Insurers have been exploring alternative asset classes in the face of ultra-low bond yields, which are hurting their returns, although their portfolios are still dominated by traditional fixed-income investments.
Deep Banerjee, an insurance specialist at S&P Global Ratings, said the industry’s aggregate exposure to direct residential loans was only about 1 or 2 per cent.
At present AIG has less than $4bn of residential mortgages on its books, a small fraction of its $515bn balance sheet, although the insurer is a bigger operator in other real estate markets.
The group has about $24bn worth of commercial mortgages and last week disclosed the sale of three high-rise office towers, a retail mall and five-star hotel in Seoul.
Mr Dachille said that AIG’s residential portfolio had been “limited” in large part because it had already been exposed to the housing market through its mortgage insurance business, United Guaranty Corporation.
AIG struck a deal in the summer to sell UGC, the biggest US private sector mortgage insurer, for $3.4bn.
Speaking at AIG’s investor day in New York on Friday, Mr Dachille did not quantify by how much the company wanted to increase its exposure to residential mortgages.
However, a presentation slide implied that by doing more mortgage loans, the insurer aimed to replace a big chunk of the annual profits of about $400m that it would forgo by selling UGC.
“Direct investments in residential mortgages rebalance exposure,” the slide said.
“As we speak now, the team is working on a number of transactions to gradually increase the scale of the activity,” Mr Dachille said in his presentation. As well as purchasing loans, he said these included managing securitisations and reinsurance deals.
The move would give more financial backing to the $1.9tn US residential mortgage market, the most important consumer credit sector. Banks have been in retreat since the financial crisis as they grapple with tougher regulations and mis-selling penalties.
Non-banks are on track to account for more than half of US mortgage originations in 2016 for the first time since Inside Mortgage Finance began tracking the market 30 years ago.
AIG does not intend to originate residential mortgages itself, however. Instead, it plans to acquire loans from direct mortgage lenders — both banks and non-banks — and securitise them. The insurer is run by Peter Hancock, a former JPMorgan banker who was a Wall Street pioneer in credit derivatives.
AIG was brought to its knees in the financial crisis, racking up huge losses on credit derivatives, and had to be bailed out by taxpayers for about $185bn.
It has since shrunk significantly, repaid the bailout funds and returned to profitability. But more recently it has faced calls from activist billionaire Carl Icahn to improve returns and accelerate the pace of disposals. Last week the group struck a deal to sell its life insurance business in Japan for a $430m loss.