American International Group Inc. said Wednesday it expects “minimal net effects” from the recent earthquake and tsunami on the financial condition of its local Japanese operations, including those of Fuji Fire and Marine Insurance Co., in which AIG holds a 54.66 percent stake.
Fuji Fire and Marine participates in the government-backed Japanese Earthquake Reinsurance Co. (JERC), through which AIG said it believes the “vast majority” of any claims for the earthquake and tsunami will pass. This reinsurance system defines the various limits of liability to be covered by the government, the JERC, and private, general insurance companies in Japan, including Fuji Fire and Marine. The maximum possible loss Fuji Fire and Marine could incur under the program is about $508 million, according to AIG.
Last week, AIG issued a preliminary pre-tax insurance loss estimate for Chartis, its property/ casualty insurance unit, of $1.0 billion, or $0.9 billion after tax for the first quarter of 2011, related to various catastrophes, including a pre-tax insurance loss of $700 million related to the earthquake in Japan, consequent tsunami, and related exposures. Those preliminary estimates, however, excluded losses arising from AIG’s general insurance operations in Japan that participate in the JERC, including Fuji Fire and Marine.
In accordance with Japanese statutory accounting rules, as well as the requirements for private sector participants in the JERC, Fuji Fire and Marine had previously established catastrophe reserves of approximately $482 million for potential claims associated with earthquake damage to personal dwellings. These reserves, which are backed by funds held by the JERC, exist to cover the potential losses that Fuji Fire and Marine could sustain in connection with JERC-related claims, and limit the maximum net additional cash payments to the JERC to $26 million, AIG said.
As U.S. GAAP prohibits the establishment of catastrophe reserves in advance of a catastrophic event occurring, the total net JERC losses that Fuji Fire and Marine actually incurs in connection with the Japan earthquake will flow through AIG’s income statement. However, AIG said it expects minimal net effects on the statutory capital and liquidity of its local Japanese operations, including those of Fuji Fire and Marine, in light of the company’s existing local reserves.
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