Insurance giant American International Group (AIG) has reported a net, albeit smaller loss in the third-quarter of 2018, of $1.3 billion as a result of significant catastrophe losses. However, the insurer’s underwriting loss did narrow year-on-year thanks to reinsurance.
AIG’s $1.3 billion net loss compares to a $1.7 billion net loss for the same period in 2017, and was impacted by $1.6 billion of net pre-tax ($1.3 billion net after-tax) catastrophe losses, which the firm states is within its previously announced range.
Over half of AIG’s $1.6 billion catastrophe losses in the quarter came from losses in Japan, which the company says reflects the “unique severity and frequency” of one of the country’s worst catastrophe years in a quarter of a century.
Japan cat losses are net of $264 million of reinsurance recoveries under AIG’s Japanese catastrophe reinsurance arrangement, says the firm.
In North America, where losses accounted for just under half of the firm’s total Q3 cat loss bill, hurricane Florence impacts and revisions to the loss estimates from the California mudslides were the main drivers.
The insurer states that it has exhausted roughly $700 million of its $750 million retention under its North America aggregate catastrophe reinsurance program as a result of Florence, California mudslides’ revisions, and the expected hit from hurricane Michael in the fourth-quarter.
As noted previously by Reinsurance News, analysts previously expressed concern about AIG’s cat losses given that Q4 is ongoing, raising concerns over the efficacy of the company’s reinsurance program.
Year-on-year, gross and net premiums written increased by 3% and 4%, respectively, and, while AIG reported an underwriting loss within its general insurance segment of $1.7 billion, this is a 55% decline from the $3.8 billion recorded a year earlier.
So, it’s clear that the firm’s underwriting result, while still worse than analysts had expected and in negative territory, benefitted from its use of reinsurance protection in the third-quarter, which also helped to bring down the loss ratio year-on-year.
AIG’s loss ratio for the third-quarter of 2018 reached 88.6%, compared with 124.1% a year earlier.
The firm’s combined ratio, while still in unprofitable territory at 124.4% in Q3 2018, strengthened against the 157.1% recorded in the same period in 2017.
Net prior year loss reserve development was flat year-to-date, and which AIG says includes net unfavourable prior year loss reserve development of $170 million in Q3 2018.
The insurer also commented on the utilisation of its adverse development cover (ADC) during the quarter, stating that the 80% share of the 2015 and prior adverse reserve development that was ceded under the cover, and excluded from adjusted pre-tax income, was $723 million.
This shows that AIG also benefited from its ADC agreement with Warren Buffett’s Berkshire Hathaway during the period.
AIG’s President and Chief Executive Officer (CEO), Brian Duperreault, said: “In the third quarter we continued to execute against our strategic priorities for delivering longterm, profitable growth. While managing a significant number of global catastrophic events, General Insurance continued to make progress against key initiatives, including improving underwriting capabilities, repositioning reinsurance structures, adding world class talent and driving efficiencies.
“We remain on track to produce an underwriting profit. Life and Retirement achieved increased sales and solid double digit returns, reflecting the strength of our product expertise and distribution networks.
“Looking ahead, we continue to work with a sense of urgency and are taking decisive actions across the company to position AIG for the future.”
With just $50 million of its retention left under its North American reinsurance program, it could be that AIG benefits from further reinsurance support in the fourth-quarter of 2018, although it’s important to remember that the $700 million it estimates to have already exhausted does include the high-end estimate of its hurricane Michael loss.
Catastrophe events in 2018 have by no means been benign, although the subsequent impact on the global insurance and reinsurance industry has been lower than last year, which included hurricanes Harvey, Irma, and Maria.
Competition remains intense in the global re/insurance industry, with traditional and alternative capital looking to play a role, which, is expected to continue to pressure rates, especially in the P&C sector, at the upcoming renewals.
However, AIG’s CEO expressed confidence that the firm remains on track to produce an underwriting profit, so it will be interesting to see how things pan out for AIG and the broader market over the remainder of 2018 and into the January renewals season.
