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Why AIG Is Pulling Money From Hedge Funds

May 3, 2016, 2:35 PM UTC
(FILES): This September 17, 2008 file photo shows the logo of American International Group Inc. outside their office in the lower Manhattan area of New York. The US Federal Bureau of Investigation is probing allegations of fraud by 26 Wall Street firms including several investment giants whose collapse sent world markets into turmoil, US media said September 23, 2008. The FBI has set its sights on investment titan Lehman Brothers, mortgage giants Fannie Mae and Freddie Mac and insurer AIG, in a wide-reaching inquiry that comes as lawmakers rush to agree a 700-billion-dollar government bailout of the troubled US financial sector. AFP PHOTO / Files / Stan HONDA (Photo credit should read STAN HONDA/AFP/Getty Images)
Photo by Stan Honda — AFP/Getty Images

American International Group Inc, under fire from investors to improve its performance, reported a lower-than-expected profit for the third straight quarter as poor returns from hedge funds hurt its investment income.

Shares of the biggest U.S. commercial insurer by premiums fell 3.3 percent in extended trading on Monday.

AIG has been scaling back investments in hedge funds, which have borne the brunt of excessive market volatility in the past year.

Big-name hedge funds favored by pension funds and the ultra-wealthy for their track record of stellar returns took a battering in the first quarter of 2016, with some posting their worst ever start to a year on record.

AIG’s weak results come at a time when the company is facing the possibility of having to set aside more capital as regulators worry about financial firms deemed “too big to fail.”

The insurer’s near collapse in 2008 and its $182 billion bailout by the U.S. government led to its inclusion in the Federal Reserve’s list of “systemically important financial institutions” (SIFIs).

Chief Executive Peter Hancock said in March that a judge’s ruling that MetLife Inc was not “too big to fail” opened up an opportunity for AIG to seek an exemption from the designation.

Investors will look for an update on AIG’s position when the company holds its post-earnings call on Tuesday.

AIG has been under pressure from activist investor Carl Icahn to split into three independent companies.

In February, the insurer agreed to add two members nominated by Icahn to its board. Billionaire investor John Paulson and Samuel Merksamer, a managing director at Icahn Capital LP, are expected to join AIG’s board next week.

The operating profit attributable to AIG fell 54 percent to $773 million in the first quarter, partly due to restructuring costs of $122 million.

On a per-share basis, AIG earned 65 cents, far short of the average analyst estimate of $1.00, according to Thomson Reuters I/B/E/S.

Pre-tax income in AIG’s commercial property and casualty insurance business, its biggest, fell 38.5 percent to $720 million. The unit’s net investment income fell about 44 percent to $577 million.

Shares of AIG, which traces its roots to a two-room office in Shanghai in 1919, were trading at $54.75 after the bell.

Up to Monday’s close, the stock had fallen nearly 9 percent this year.