American International Group, Inc. (AIG) has reported that it expects both the cut to the UK Ogden Discount rate and its adverse development cover with Berkshire Hathaway to impact its Q1 2017 results.
The Lord Chancellor and Justice Secretary, Liz Truss, announced early in 2017 that the UK Ogden discount rate would be cut from 2.5% to -0.75%, leading a number of insurers and reinsurers to analyse and subsequently announce any financial impact.
Insurer and reinsurer AIG is the latest firm to announce an impact to its prior year loss reserves in response to the Ogden rate decline, saying that it expects to record an increase to prior year loss reserves of around $100 million, pre-tax, in its Q1 2017 results.
As at December 31st, 2016, AIG’s carried reserves were estimated with the expectation of a reduction of the Ogden rate to 1%, meaning that for AIG, like many other firms, the cut to -0.75% was steeper than anticipated.
“This discount rate change primarily impacts the Liability & Financial Lines business within Commercial Insurance in the United Kingdom,” said AIG in a recent announcement.
Furthermore, AIG has announced that it will recognise an estimated nominal pre-tax deferred gain of $2.6 billion in Q1, in relation to its adverse development cover entered into with Warren Buffett’s Berkshire Hathaway.
Starting in Q1 2017, AIG says it will begin to gradually pay off the deferred gain over the expected reinsurance recovery period, with the amount being included in pre-tax operating income for the Liability and Financial lines operations.
“First quarter 2017 results will reflect a partial quarter of amortization of approximately $40 million pre-tax based on the closing date of the contract of February 3, 2017,” explains AIG.