American International Group, Inc. (AIG) announced that it will incur a net, after tax charge of $1.8 billion in the fourth quarter of 2002 related to an increase of general insurance net loss and loss adjustment reserves. This action follows the completion of AIG’s annual year-end loss reserve study.
In discussing the reserve increase, AIG Chairman M. R. Greenberg noted, “AIG annually reviews and assesses its general insurance loss reserves and makes necessary adjustments as required. As part of the process, we take into consideration a number of external factors such as litigation trends. Having completed our review, we confirmed that judgments and settlements reached record high levels of severity and frequency in the course of 2002, and claims increased across a number of casualty lines. As a result, AIG has decided to make additions to its general insurance loss reserves.
“Approximately 60 percent of the reserve increase will be applied to excess casualty loss reserves, including excess workers’ compensation; 25 percent to directors and officers liability; and 15 percent to other casualty, including healthcare liability. Virtually all of the reserve additions related to 2002 developments pertain to accident years 1997 through 2001. Since 2000, rates have risen in these classes of business after more than a decade of erosion, and are continuing to rise in 2003.”
According to Greenberg, “Unlike the abrupt burst of the asset bubble, the liability bubble has yet to contract in our economy. The rampant rise in jury awards and a tort system in urgent need of reform are important aspects of the overall U.S. liability picture. AIG is working hard, as are others, to achieve meaningful tort reform in the current session of Congress.
“This action does not include an asbestos reserve increase. AIG’s reserves for asbestos-related claims continue to be appropriate. As previously stated, AIG’s overall asbestos related liabilities are relatively small. The vast majority of asbestos and environmental claims emanate from policies written in 1984 and prior years, at a time when AIG’s commercial insurance business was very small. Since 1985, standard policies issued by AIG companies have contained an absolute exclusion for asbestos and pollution related damages.
“Overall for 2002, AIG expects to report record general insurance cash flow. AIG’s shareholders’ equity at year-end 2002 will exceed the record of $58 billion reported at Sept. 30, 2002, despite the reserve charge.
“With more than $58 billion in capital and approximately $30 billion in general insurance loss and loss adjustment reserves, AIG’s financial strength has never been more valued in the marketplace than it is today, as businesses and consumers seek to purchase insurance from the strongest companies. Our worldwide general insurance operations are market leaders, and we are well positioned to succeed in the current market environment.”
According to Greenberg, AIG expects good things in the year ahead.
“Our general insurance business will continue to grow, achieving record premiums both in the United States and overseas. Repeating the trend in 2002, the majority of this premium growth is expected to result from rate increases versus the assumption of additional risk exposures.
“In January, new cash flow for investments from domestic general insurance operations reached an all-time record of over $800 million. Total cash flow for all of 2003 should substantially exceed the record level of 2002. This should have a positive impact on net investment income, even at today’s low interest rate levels. With the anticipated growth of earned premium in AIG’s general insurance operations, general insurance loss reserves are expected, in the normal course of business, to grow between $4-5 billion in 2003.
“And we expect to achieve a return on equity of approximately 15 percent in 2003.”
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