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AIG sets up legacy reinsurance unit, as it takes $6.7bn tax act charge

9th February 2018 - Author: Steve Evans

Insurer American International Group (AIG) announced its results yesterday, revealing continuing issues with legacy business, resulting in another reserve charge, but also the launch of a Bermudian legacy reinsurance platform.

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The insurer also announced a one-off charge of $6.7 billion related to the enactment of the Tax Cuts and Jobs Act, which sent its net loss for the quarter to precisely the same amount.

But on the brighter side there are signs of improvement, as AIG’s adjusted after-tax income hit $526 million, or $0.57 per diluted share, for Q4 2017, much better than the after-tax loss of $2.8 billion it reported in the prior year.

“The fourth quarter was another important step forward in positioning AIG for the future. Since I joined the company in May, we’ve added to our talent base, assessed and initiated underwriting actions, and established a new operating structure.

“2017 represents a starting point from which we expect to build and 2018 will be a year of execution. Our actions to diversify our business and pursue profitable growth were further reflected in our January announcement of the acquisition of Validus,” explained Brian Duperreault, President and Chief Executive Officer.

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AIG has been beset by legacy issues and reserve charges in recent years, resulting in consecutive negative quarters. But with Duperreault at the helm and a new expansive strategy, that saw the insurer target the acquisition of Bermudian Validus, there are signs of improvement.

More evidence of AIG’s efforts to put its house in order emerged in yesterday’s results announcement, with the company announcing that it has set up a Bermuda-domiciled legal entity named DSA Reinsurance Company, Ltd. (DSA Re) to act as the firms main run-off reinsurer.

DSA Re will reinsure AIG’s Legacy Life and Retirement and Legacy General Insurance run-off lines, which the insurers says, “will allow AIG to derive operational efficiencies by consolidating its legacy books in one legal entity and under one management team, while continuing to honor all policyholder commitments and client relationships.”

Once DSA Re is approved, AIG expects to reinsurer a huge $37 billion legacy block to the Bermuda reinsurer, which is more than 80% of Legacy total insurance reserves. DSA Re will also be backed with around $40 billion of invested assets managed by AIG Investments as well.

AIG will be hoping that by segregating these legacy portfolios in a new reinsurance company, with a dedicated management team, that it can extract greater profit from them while controlling the losses. Additionally, having its own investments team working on the asset side could also generate additional efficiencies.

Controlling and profiting from legacy and run-off portfolios is key for a company the size of AIG. With run-off books becoming increasingly popular to large investors as well, putting its legacy business into DSA Re may provide AIG with an opportunity to look at opportunities to sell on segments it does not feel it wants to keep, further down the line.

AIG saw more stability in its legacy reserves in Q4, which is a sign that things are coming under greater control and the insurer will be hoping that trend continues.

“Our fourth quarter and full year 2017 results were significantly impacted by catastrophe losses. Despite full year record catastrophe losses of $4.2 billion, we delivered approximately $1.5 billion in pre-tax income and over $3.0 billion in adjusted pre-tax income. Importantly, our fourth quarter reserve review resulted in modest net adverse development and our General Insurance North America Commercial business showed notable improvement and reserve stability. Personal Insurance and Life and Retirement operations continued to deliver solid performance and benefit from their diversified offerings,” Duperreault said.

Adjusting the insurers structure, buying more reinsurance, putting controls around legacy reserves, all while expanding with targeted acquisitions that add diversification and new business avenues, all sounds like a much more positive outlook for AIG under its new leadership.

You can read AIG’s results in full here.

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