Analysts at Morgan Stanley estimate $17 million in excess reserves for large primary insurer American International Group (AIG), marking its first redundancy since Morgan Stanley’s initial study eight years ago, and, which suggests large reserve issues are finally behind the company.
Following years of reserve charges at AIG, Morgan Stanley analysts estimate a $17 million excess reserve, which, it feels is an important step for the company given its recent challenges that saw investor concerns increase as profitability declined.
Overall, AIG has U.S. statutory reserves of $33 billion, meaning that the $17 million redundancy is perhaps somewhat of a thin cushion, but a cushion nonetheless, and one that reflects significant reserve strengthening, reinsurance with Warren Buffett’s Berkshire Hathaway, and more conservative reserving, said Morgan Stanley.
“There could still be adverse development, but we are more confident that large reserve issues are finally behind he company,” said analysts, in a recent note on AIG’s reserves.
Specifically, and as the top three reserve lines, Morgan Stanley analysts see excess in Workers’ Compensation (~$900 million) offsetting deficiencies in both Other Liability Claims-Made (~$770 million) and Other Liability Occurrence (~$23 million).
Ultimately, Morgan Stanley analysts feel that AIG’s first reserve redundancy since 2010 should alleviate investor concern, something that could also be supported by the fact AIG is starting to attract talent and that it’s targeting P&C underwriting profitability by year-end.
Achieving profitability within its P&C underwriting business by year-end 2018 is by no means “an easy task,” warned analysts, “but we think the actions taken in the last 12 months will start to bear fruit in the coming quarters.”
Analysts note that since the arrival of Brian Duperreault at AIG in 2017 the firm has attracted some top-level management, including the likes of Peter Zaffino, Tom Bolt, and Mark Lyons. The latter of which Morgan Stanley analysts expect to further strengthen AIG’s reserve philosophy and practice.
As stressed by analysts, it is possible for further adverse development at AIG, something that investors will likely keep a close eye on given the recent performance of the company and the fact the reserve redundancy sits at just $17 million.
However, reserves are still in excess, which is something Morgan Stanley analysts haven’t seen since its initial study on the company eight years ago, and which suggests the days of substantial reserve charge after substantial reserve charge might just be behind the insurer.
