But insurance companies are, not surprisingly, watching closely AIG's troubles--particularly those firms whose own portfolio investments mimic AIG's. There are many reasons for AIG's financial woes; clearly, though, its portfolio investments in real estate assets and securities are among the top of the list.
AIG is one of the largest owners of Fannie Mae and Freddie Mac preferred shares, for starters. The company also has a strong third party real estate management and development division--AIG Global Real Estate--that holds some 53 million sf of retail, residential, industrial, office and hospitality properties around the world, according to the insurer's Web site.
But AIG's troubles--significant as they are--would pale in comparison should other insurance companies begin to falter for similar reasons. Longer term, it is feared that commercial real estate asset investments will be shunned by insurance firms even when the market recovers--something that would be a serious blow to the capital markets as this institutional investor class has invested billions in recent years in CMBS, MBS and other securities.
Insurance companies' investments--much like those of pension funds--are beholden to strict regulatory requirements, which is why the majority of their portfolios are invested in fixed income. But in the wiggle room allowed to insurance firms, it is clear that their allocations of real estate assets and securities have grown in the last few years, to as much as 10% in some aggressive portfolios.
Indeed, an industry reassessment of these assets has been underway for some time, says one analyst that follows insurance portfolio investments. "All asset classes are being re-evaluated right now," this analyst tells GlobeSt.com. "It is a very sensitive subject, given the regulatory oversight in this space, but clearly many firms are coming to the conclusion that returns from commercial real estate may not be worth the risk."
It is too soon, however, to assume that insurance companies will en mass roll back allocations in real estate, Will Silverman, corporate managing director in the capital transactions group at Studley, tells GlobeSt.com. "Considering that equity and real estate sectors are having similar experiences in the capital markets, it is unclear when, where or whether target allocations will move. "Any movement will be a function of the perceived desirability of these assets classes moving forward," he concludes.
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