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Rise in large industrial claims driving reserve surprises, suggests J.P. Morgan

17th February 2017 - Author: Luke Gallin

Following AIG’s recently announced $2.79 billion Q4 loss as a result of a $5.6 billion reserve charge, analysts at J.P. Morgan have suggested that the negative surprise, which is unlikely to be exclusive to AIG, could be the result of increased large industrial claims, particularly in the U.S.

AIG’s fourth-quarter 2016 performance was significantly hindered by a huge $5.6 billion reserve charge, which, is to be largely offset by its retroactive adverse development reinsurance agreement with Warren Buffett’s Berkshire Hathaway.

In a recent note, J.P. Morgan analyst Jimmy Bhullar, highlighted a surprise with the current year commercial lines combined ratio ex development and ex nat cats of both AIG and also insurer Zurich, during Q4 2016. For AIG the combined ratio was 97.5% compared with a consensus estimate of 92.7%, and for Zurich the combined ratio was 98.5%, above the 97.8% consensus estimate, says the note.

“We believe part of the negative surprise is linked to a rise in large industrial claims, and we link this to the recovering economy, particularly in the US,” says J.P. Morgan.

It’s an interesting thought, and suggests that not only other, large insurance companies with a strong focus on large commercial, industrial and corporate risks could also be exposed to similar reserve surprises as seen with AIG, but also some of the world’s reinsurers.

Reinsurance and retrocessional capacity is increasingly and directly underwriting large corporate risks, with firms such as Munich Re, Swiss Re, and Berkshire Hathaway via its National Indemnity Company (NICO) subsidiary, becoming increasingly active in the space.

J.P. Morgan suggests that a rise in large industrial claims in the U.S. is impacting the loss ratios of insurers, and more so those with high exposure to U.S. large industrial and corporate risks, so it’s not unreasonable to suggest that the loss ratios of global reinsurers could also be under threat from a hike in large industrial and corporate claims, which could be part of the recovering U.S. economy, according to J.P. Morgan.

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