American International Group’s consolidated year-to-date (YTD) catastrophe losses are already 81% higher than its full year expected average annual loss (AAL), raising concerns over the efficacy of the company’s reinsurance program, according to Goldman Sachs.
AIG expects between $1.5 billion and $1.7 billion in cat losses for the third quarter (double what Sachs had expected), with another $300 million to $500 million for hurricane Michael to be reported in Q4.
The company’s Q3 cat losses primarily relate to typhoons Jebi and Trami and hurricane Florence, as well as unfavourable reserve re-estimates of previously reported cat losses from the California mudslides which occurred in early 2018.
Between $0.9 billion and $1 billion in pre-tax cat losses, or roughly 60%, of the overall load is attributable to Japan and Asia. This well in excess of Sachs’ estimated Japan windstorm probable maximum loss (PML) for a 1-in-100 years event of $0.7 billion.
Losses include the losses incurred from Validus, the newly acquired business that will be incorporated in AIG’s consolidated results for the first time in Q3.
Even though AIG’s North America aggregate cat reinsurance program may now be $50 million shy of the program’s $750 million attachment point – assuming $500 million of losses for hurricane Michael – Q4 could still prove to be a meaningful cat quarter as Validus’ business and International cat losses are not covered under this aggregate reinsurance program.
While large cat events can result in annual losses in excess of the company’s AAL, it is noteworthy that overall industry cat losses this year, while not benign, are also not abnormally high, says Sachs.
As such, for AIG to be so far ahead of its full-year AAL with another quarter yet to be reported is concerning.
Sachs are particularly concerned since management has been very vocal about lowering volatility through reinsurance and risk management.
While not all international reinsurance may be in place yet, and while Validus’ risk has not yet been reinsured, 9M18 results increase the concern that AIG’s targets may be too aggressive, at least in the near-term, says Sachs.
