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AIG once held more than $100M of Puerto Rico bond issue now on the brink of default


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AIG once held more than $100M of Puerto Rico bond issue now on the brink of default companies held a combined $6.6 million in the Puerto Rico GovernmentDevelopment Bank bonds that had been expected to default May 2, based uponyear-end 2015 carrying value. But their collective position had once been manytimes larger prior to a series of years-ago divestitures, primarily by units ofAmerican International GroupInc.

SNLInsurance data show that carrying value of the holdings of U.S.-domiciled propertyand casualty and life insurers in the Government Development Bank's 4.704%taxable senior notes due May 1, 2016, was well below the actual cost of thebonds of just over $18 million in the aggregate. Holders recordedother-than-temporary impairments of nearly $5.8 million and experienced changesin unrealized value of a negative $8.3 million in 2015, according to the SNLdata, which reflect a query of disclosures made on Schedule D of annualstatements for bonds with the CUSIP 745177EX9.

PuertoRico Governor Alejandro García Padilla declared a moratorium on the Government DevelopmentBank's debt service obligations, highlighted by the $400 million in principaland $22 million in interest due on the 4.704% notes. The Government DevelopmentBank said that it plans to make the interest payment, and it announced anagreement in principle regarding the indicative terms of a proposedrestructuring of certain outstanding debt with an ad hoc group of bondholders.As part of that announcement, the group reported that it expected to forbearfor a period of 30 days from pursuing legal action related to the May 1 debtservice payment regarding the portion of the bonds its members hold.

AMay 2 Bloomberg News article on the prospective default ranked and theMerchants Mutual group among the five-largest holders of the GovernmentDevelopment Bank debt at issue. Texas Mutual, however, reported in thatthe bonds had carrying value of $580,000, following an other-than-temporaryimpairment of $1.7 million and a change in unrealized value of a positive$294,000. The company listed the actual cost of the bonds at $2 million. Thecombination of Merchants MutualInsurance Co., Merchants National Insurance Co. and heldapplicable bonds with a carrying value of $435,000, relative to the actual costof just over $1.5 million, as they recorded a change in unrealized value of anegative $843,000 during the year.

Thelargest insurance industry holder, according to SNL data, was San Juan, PuertoRico-based Cooperativa de Segurosde Vida de Puerto Rico, or COSVI. It maintained a position withcarrying value of nearly $2.8 million relative to an actual cost of $9.5million as of year-end 2015, after the holdings experienced a change inunrealized value of a negative $6.7 million during the year.

Alltold, COSVI disclosed in the notes to its 2015 annual statement that obligations of theCommonwealth of Puerto Rico it held at year's end had aggregate cost of nearly$151.7 million and estimated fair value of $83.8 million, with the latterfigure incorporating the impact of gross unrealized gains of $261,549 andlosses of $68.1 million. The company reported net cash and invested assets of$355.2 million as of Dec. 31, 2015.

COSVIsaid in the filing that it transferred the risk associated with Puerto Ricobonds by ceding $128.4 million that apply to annuity contracts pursuant to anaggregate excess-of-loss reinsurance agreement that took effect July 1, 2015.It did not record any other-than-temporary impairments on any of the PuertoRico obligations, including the Government Development Bank's 4.704% notes.

Bondsrated NAIC-6 accounted for 22.5% of the company's $279.8 million in bonds,including short-term and cash-equivalent bonds, as of Dec. 31, 2015, accordingto the annual statement. As defined by the NAIC's Securities Valuation Office,instruments rated NAIC-6 are either in or are near default.

AnotherPuerto Rico-based company, Cooperativa de Seguros Multiples de Puerto Rico unitReal Legacy Assurance Co.Inc., was the only other P&C or life company with a position inthe 4.704% Government Development Bank notes with year-end 2015 actual cost of$1 million or more. The full P&C group's position had actual cost of $2.2million and carrying value of $908,000 as of Dec. 31, 2015, reflecting an other-than-temporaryimpairment of $2.2 million and a change in unrealized value of a positive$492,000.

P&Cand life companies initially had been much more heavily invested in the bondsshortly after their issuance in May 2011, holding $133.5 million worth of themat actual cost as of year-end 2011. Of that amount, $55.2 million pertained toAIG's U.S.-domiciled P&C units and $49 million had been associated withAIG's U.S.-domiciled life subsidiaries.

and Commerce & Industry Insurance Co. each held 4.704%Government Development Bank notes with actual cost of $20 million as ofyear-end 2011. Variable AnnuityLife Insurance Co. and Western National Life Insurance Co.'s positions at thattime totaled $17.5 million apiece. P&C unit Eaglestone Reinsurance Co. also held $10 million worthof the bonds at year-end 2011 actual cost, as did .

TheAIG companies, with the exception of AIGInsurance Co. - Puerto Rico, divested their positions in theirentirety through a series of transactions that occurred during the first twomonths of 2013. They recorded a gain of approximately $344,000 in the processof disposing of bonds with aggregate par value of $99 million. AIG InsuranceCo. - Puerto Rico later sold $1.4 million of the bonds at a loss ofapproximately $191,000 in March 2014.

TheGovernment Development Bank issued a total of $650 million in Series 2011 Bnotes with maturity dates of between May 1, 2014, and May 1, 2016, and interestrates of between 3.67% and 4.704%, according to its most recent basic financialstatements and required supplementary information filing. The bonds with the745177EX9 CUSIP were due May 1, 2016.

Standard& Poor's Ratings Services lowered its issuer credit rating on theGovernment Development Bank to selective default from CC in April inanticipation of a "virtually certain" default on the May 1 maturity.

S&P Ratings and S&PGlobal Market Intelligence are owned by S&P Global Inc.