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$3bn of cat losses & huge $836mn reserve charge hit AIG in Q3

3rd November 2017 - Author: Luke Gallin

As well as catastrophe losses of $3 billion, insurance giant AIG took another large adverse development charge in the third-quarter of 2017, of $836 million, resulting in an operating loss worse than expected.

AIG buildingThe insurer fell to an operating loss of $1.1 billion in the third-quarter of 2017, compared with an operating income of $1.1 billion a year earlier.

While pre-announced catastrophe losses primarily from hurricanes Harvey, Irma, and Maria of $3 billion signalled a challenging quarter for the company, a huge $836 million pre-tax reserve charge in commercial lines, resulting in a sizeable miss in commercial P&C, has made matters worse.

The reserve charge saw the firm increase its 2017 loss estimates by ~2%, or approximately $187 million, which, according to analysts at Credit Suisse, amounts to a 3% annualised earnings impact.

Despite the huge reserve charge and subsequent $1.1 billion loss, ratings agency Standard & Poor’s (S&P) said weak Q3 results at AIG “do not have an immediate impact on our ratings or negative outlook.”

“Our primary rating focus continues to be monitoring AIG’s improvement of underwriting fundamentals, with catastrophe losses being a lesser indicator of executional effectiveness,” explained S&P.

Commenting on the company’s performance and looking ahead to 2018, Chief Executive Officer (CEO) Brian Duperreault, remained positive; “We are laser focused on commercial underwriting and taking actions to enhance underwriting tools and, more importantly, our talent base – so much so that I have declared 2018 the ‘Year of the Underwriter.’ With this increased focus on underwriting, and our recently announced changes to AIG’s operating structure and executive leadership, we will continue to execute on our strategy to better position AIG for long term profitable growth.”

$705 million of the reserve charge is related to accident year 2016, which Credit Suisse says it understands is spread across a number of segments.

Furthermore, AIG’s adverse development cover with Berkshire Hathaway subsidiary, National Indemnity Company (NICO), covers a reported 80% of AIG’s U.S. commercial long-tail exposures for accident years 2015 and prior, meaning 2016 isn’t covered in the protection.

“We are leaving our estimates and price target unchanged for now until we have a better understanding of this quarter’s events on the earnings call tomorrow morning. Most importantly, we will be looking for more tangible evidence that the quarter’s charge was a “reset” and that there will be less reserve volatility going forward,” said Credit Suisse.

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